One of the most disheartening aspects of owning stock in companies that do not pay dividends to investors is that to reap any spendable income from the stock you must sell it. While you may have picked a winning stock, all the profits are locked inside the asset. The beauty of dividend stocks is that you can retain your ownership interest in a great company while collecting a share of its profits that you can spend as you wish.
There is always a chance that the share price of a dividend stock will drop so low that it wipes out any gain you would have received from its dividend payments. Companies also are not required to pay a dividend to their shareholders. A company's board of directors could vote to reduce or entirely eliminate the dividend if they decide the company would be better off not making payments to its investors.
Dividend stocks are mostly favored by conservative investors who prefer the stability of receiving a steady dividend check as opposed to the thrill seekers who try to pick stocks that could double in value overnight. Dividend investors tend to be older people who need the steady income and cannot afford to take risks with the money they have saved. Dividend stocks also are preferred by conservative investors who prefer the steady approach to building wealth over a long period of time with the least possible risk of losing the money they invest.
When buying stocks with dividends, investors should always take a look at the company's earnings to see if they are growing or declining. A company's earnings will provide strong clues as to how financially sound it is. If a company is posting bigger profits year after year, it's a good indication it is growing and thriving. Such a company is likely to maintain or even grow its dividend payment in the future. If its earnings are flat or declining, it could be a sign the company is facing trouble, which may ultimately impact its ability to pay a dividend in the future.
Investors who buy stocks with dividends also want to look at the company's history of paying dividends. In an ideal situation, the company will have a solid unbroken history of paying steadily rising dividends to its investors for many years. Like earnings growth, a company's dividend payment history speaks volumes about its financial strength and corporate management.
Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.