What is a dividend and how do they work?

Dividends are cash payments companies distribute to shareholders from profits, typically quarterly. Dividend yield (annual dividend ÷ stock price) shows the return rate. For example, a $100 stock paying $4 annually has a 4% yield. Mature companies often pay reliable dividends, while growth companies reinvest profits instead.

Should I reinvest dividends or take cash?

Reinvesting dividends (DRIPs - Dividend Reinvestment Plans) compounds your returns by purchasing additional shares automatically. This accelerates wealth building significantly over decades. Take cash dividends if you need income now (retirement) or have better investment opportunities. For long-term wealth building, always reinvest dividends.

Are dividends taxed differently than other income?

Qualified dividends are taxed at favorable long-term capital gains rates (0%, 15%, or 20%) if you held stock 60+ days. Non-qualified dividends are taxed as ordinary income (10-37%). Most U.S. company dividends qualify. Dividends in tax-advantaged accounts (IRA, 401k) grow tax-deferred or tax-free (Roth).

What's a good dividend yield?

Average S&P 500 dividend yield is around 1.5-2%. Yields of 3-6% are attractive but verify sustainability. Extremely high yields (8%+) might indicate financial distress or unsustainable payouts. Focus on dividend growth rate, payout ratio (dividends ÷ earnings, should be under 70%), and company financial health, not just yield.

What is dividend growth investing?

Dividend growth investing focuses on companies that consistently increase dividends annually. These 'dividend aristocrats' (25+ years of increases) provide rising income and typically outperform over time. Your effective yield on original investment grows as dividends increase. A 3% initial yield growing 7% annually becomes 5.9% yield in 10 years.