Financial Word of the Week: Dividends

It’s nice to own stocks, sure. But do those companies pay you dividends for owning them?

A dividend is like a corporate profit split. As the company earns profits, they can choose to pay out a percentage of those profits to their shareholders.

Shareholders love dividends, because it gives them an interest in the continuing profits the company is making. Oftentimes, shareholders will even reinvest their dividend payments and buy new shares.

Had you been doing that with cigarette maker Altria (NYSE:MO) since 1970, you would have seen a return of nearly 98,000 percent to date. In other words, every $1,000 you invested would have turned into nearly a million dollars.

Another great thing about dividends is that they give you a clue as to how a company is doing financially. If a company is lowering its dividends, that’s an indication it is suffering financially – and you almost certainly wouldn’t want to own it. If a company is raising its dividends, it is growing quickly and would be one to keep in your portfolio.

Dividends are extremely helpful in creating lasting, true wealth. So whenever you’re searching for a stock, check to see if it’s been paying increasingly large dividends. If it has, you should be able to count on its “profit splits” for years to come.