Dividend definition
Dividends are basically a bonus that a company gives to its shareholders quarterly for owning shares of the stock.
Lets say that you own a share of company XYZ. Company XYZ trades at 50 dollars a share and gives out 1 dollar [2%, which is the average dividend given out in todays market] worth of dividends a year. That means that every 3 months you own the stock you will get paid 25 cents per share.
25 cents per share is nothing, but imagine if you owned 100 shares, now you are getting paid 25 tangible dollars every 3 months for doing nothing. Or 1000, now your getting paid 250 every three months… The possibilities are endless.
Over the last 100 years most profits received from the stock market came from dividends and not the price of the shares of the company actually increasing!
It is usually a good sign when a company pays out a healthy dividend. That means that they are usually making enough money to be able to dish out some of its profits to its shareholders.
The average company that pays out dividends usually devotes around 25% of its earnings to paying dividends which is a nice ratio. If the ratio is ever any higher than 50% that could be troublesome because they should be trying to expand their business as their number one priority.