Do you own anything that somebody might pay you to borrow?  If so, you may understand stocks that pay dividends. Maybe you have a garage full of tools?  You could open a tool rental business.  If you lived in my area, maybe I would be paying you to borrow pillars for my wedding.  (It’s true, we are renting fancy pillars from a party rental business for our wedding.)

 

I know what you’re thinking.  You have no interest in opening a business like this but let’s again take a look at our original question.  Do you own anything that somebody might pay you to borrow?  The answer is almost certainly yes.  It’s your money.  Banks and corporations want to use your money and they are willing to pay you interest to use it.  You most likely already know this because you may have a savings account but how does it work with stocks that pay dividends?

 

Companies who issue stocks to investors don’t pay interest.  They pay dividends although they are essentially the same thing.  Let’s take a look at a couple of quick facts about stocks that pay dividends:

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• Dividends are subject to tax.  When you receive a dividend payment, you pay taxes on it during that tax year.

• Dividends aren’t paid by all companies-  This is why exhaustive research is important.

• Some companies pay a higher dividend than others-  Again, do your homework.

• Unless you’re a large scale investor, Dividends aren’t going to pay your bills.  Do the math.  If a company pays an annual dividend of 15 cents per share and you only own 100 shares, you are making $15 per year.  While true you can reinvest your dividend and compound your earnings, it still takes a large investment to live on the dividend payments.

• Always invest in a stock for its merits and consider the dividend a perk.  Think of it like your employee discount you get at work.  You probably didn’t take the job because of the employee discount.

• Never count on the dividend.  When companies run in to hard financial times, they often cut their dividend.  On February 27, 2009 GE cut their dividend from 31 cents per share to 10 cents per share.  This is a real possibility.

 

Why are there stocks that pay dividends?  Because often, these companies are larger companies who are not growing at a rapid pace.  They are stable companies but their stock movement alone may not be attractive enough to investors.  Companies realize this so they pay the dividend to make their stock more attractive.

 

To Sum Up:  When you are uneasy about the stock market and don’t have a lot of tolerance for risk, invest in large well established companies with a healthy dividend.