A:

When buying stock in a company, an investor becomes a part owner of that company. In addition to possessing the small degree of voting power that comes with being a stockholder, an investor is entitled to a portion of the company's assets and earnings. However, this does not necessarily guarantee that an investor will make money without selling an appreciated stock.

Receiving a cash dividend is one of the few ways that an investor can receive a share of the company's earnings without liquidating his or her position. Keep in mind, however, that companies tend to issue dividends when they are mature and do not have many good growth opportunities in which to invest. Therefore, companies that are currently in a growth phase tend to reinvest most, if not all, of their earnings back into new projects, leaving investors with no way of taking cash out of their investments other than by selling their shares.

The interesting thing about companies that declare regular dividends is that it is generally very rare that these companies pay a reduced dividend or fail to issue one at all. A regular dividend seems to serve as an indicator for investors and pundits alike that everything is well. Because dividends are derived from earnings, it is usually of critical importance that there are enough earnings available to pay the anticipated dividend. On the other hand, if a company is experiencing financial trouble, such as declining sales revenues, the amount of earnings might not match the earlier predictions, leaving the company unable to issue its regular dividend. (To read more, see Is Your Dividend At Risk?)

In light of this, if an investor wants to reap dividends as a source of income, he or she should pick blue-chip stocks, such as Microsoft or Wal-Mart, which have already grown to a level where growth opportunities are limited but earnings are relatively stable, allowing them to pay regular dividends.

For further reading, see How Dividends Work For Investors and The Importance Of Dividends.

RELATED FAQS
  1. How do modern companies assess business risk?

    Before a business can assess or mitigate business risk, it must first identify probable or likely risks to its bottom line. ... Read Full Answer >>
  2. Why has emphasis on corporate governance grown in the 21st century?

    Corporate governance refers to operational practices, management protocols, and other governing rules or principles by which ... Read Full Answer >>
  3. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act ... Read Full Answer >>
  4. Why should investors research the C-suite executives of a company?

    C-suite executives are essential for creating and enacting overall firm strategy and are therefore an important aspect of ... Read Full Answer >>
  5. What is the difference between a direct and an indirect distribution channel?

    A direct distribution channel is organized and managed by the firm itself. An indirect distribution channel relies on intermediaries ... Read Full Answer >>
  6. How can an investor determine a company's annual return from looking at its financial ...

    The funds in a share premium account cannot be used for a company's general expenses. These funds are restricted in terms ... Read Full Answer >>
Related Articles
  1. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  2. Investing Basics

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
  3. Economics

    What Does Human Resources Do?

    Human resources (HR) is the department within a company that handles all matters relating to employment.
  4. Professionals

    8 Justifications For Sky-high CEO Salaries

    Why are CEO salaries so astronomically high? There may be more to the story than you think.
  5. Term

    What is a Feasibility Study?

    A feasibility study analyzes a company’s ability to complete a project.
  6. Professionals

    Are Stock Buybacks Always Good for Shareholders?

    Stock buyback programs aren't always done with the interests of shareholders in mind. It's important to try to understand the motivation behind such moves.
  7. Investing

    Has Nepotism Ever Worked?

    It may very well be that hiring a relative is the right course of action for you. But before you do, carefully consider how hiring family could hurt your business.
  8. Investing

    What Can A Conference Call Tell About Trends?

    Messages in a company conference call can be easily misconstrued. But there is a way to cut through the talking points to get to the real substance.
  9. Investing

    Why These Industries Are Prone To Corruption

    Corruption is like life in that it exists pretty much everywhere the conditions are favorable.
  10. Investing Basics

    Shareholders: Vote Your Proxy and Be Heard

    Voting shares, in person or via proxy ballot, is a right every shareholder should exercise. Here's why.
RELATED TERMS
  1. Corporate Culture

    The beliefs and behaviors that determine how a company's employees ...
  2. Dividend Payout Ratio

    The percentage of earnings paid to shareholders in dividends. ...
  3. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  4. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  5. Ex Gratia Payment

    A payment made to an individual by an organization, government, ...
  6. Poison Put

    A takeover defense strategy in which the target company issues ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!