Whether you are just starting to invest or have been investing for decades, dividends can be a valuable part of anyone’s investing portfolio. However, you’ll typically see dividends associated with those getting closer to retirement who are not looking for as much growth in their investments but are more focused on supplementing their income. As with any part of investing, you should first understand what it is you’re investing in. What Is a Dividend? Let’s first define what exactly a dividend is. Generally speaking, a dividend is a distribution of a portion of a company’s earnings paid to the shareholders. Dividends can provide income and growth for long-term investments. In addition, many times, there will be options to reinvest dividends back into the same company automatically. Dividend Example Let’s use a basic example of how a dividend might work. Company X has a share price of $100, and you own 100 shares. Company X announces they will pay a .50 dividend per share on the next payment date (companies announce dividend amounts several weeks before the payment). On the payment day, you’ll receive $150 worth of dividends. After that, however, the stock price will likely drop the same $1.50 as the company is technically worth that much less after paying its shareholders that amount per share. Why Companies Pay Dividends So why would a company want to pay out some of its profits? The simple answer is to attract more investors. Many companies that pay out dividends are well-established and stable companies. By paying a dividend, they attract investors, creating more demand for their stock. Often, paying a dividend is seen as a sign of a company’s power and strength, making its stock more attractive to investors. Another reason dividends are attractive to investors is to generate passive income. Many retirees are looking to increase their income. They don’t require the growth factor as younger investors, so they turn to investments that pay dividends to earn money during their retirement. Why Companies Don’t Pay Dividends Many companies won’t pay dividends for several reasons, the biggest being it hurts their bottom line. That is, the company has less cash and is therefore less valuable when paying out dividends. Usually, companies just starting up, like a new online business, are more mindful of their cash flow. For one, having less cash means less money to pay employees, fix buildings, or grow the business in countless other ways. In addition, because the company’s value is less, the stock price will typically drop when a company pays dividends, deterring smaller, less established companies from doing so. Others will argue that dividend payments don’t attract retired investors, as many would instead invest in bonds due to the fluctuation dividends may have. On the other hand, bonds have a fixed return rate, which can be more attractive since investors don’t need to guess what their income may be as with dividends. How Do You Earn a Dividend? Earning a dividend is an easy feat to accomplish.