Dividend-paying stocks can be a great way to simultaneously increase your income and free up your time. You pay for them once, and they can potentially provide you with earnings for the rest of your life. The following guide will help you understand the things you need to know to begin investing in these stocks.

Dividend-paying stocks are stocks that pay out a portion of the company’s earnings to
shareholders. When a company begins to pay out qualified dividends, it is generally a good indication that it is stable and earning enough profit that it can afford to pass it on.
Failing companies normally do not pay dividends; therefore, a dividend-paying stock is usually a solid investment.

How dividends are paid

Companies with dividend-paying stocks can distribute their dividends in several different ways. Most of them make quarterly payments to their shareholders, but some may pay monthly or annually. Monthly dividend stocks are usually trusts, partnerships or holding companies, while individual companies generally pay quarterly or annually. In addition, dividends can be paid out as either cash or shares. Many companies increase their dividends annually, and a history of doing this can be a sign that the company is doing well.

Types of dividend-paying stocks

There are many different types of stocks that pay dividends, but the most popular are REITs, ETFs, and blue chip stocks.

• REITs, or Real Estate Investment Trusts, are companies that buy real estate or other property-related assets such as mortgages. They are required by law to give most of their profit back to investors, so they usually have a pretty high yield.
• What is ETF, you ask? An Exchange Traded Fund, also known as an ETF, is a mutual fund that trades in the same way as a stock. Some of them pay dividends, and they can be a great way to diversify.
• Blue chip stocks are companies that have raised their dividends every year for at least 25 years. They may pay a lower dividend than other types of stocks, but they are a very stable choice.

Drip programs

Some companies with dividend-paying stocks automatically reinvest the dividends into additional shares for their stockholders. These shares can be either full or partial, and either all of the dividend can be reinvested or only a portion. This is called a dividend
reinvestment plan, otherwise known as a DRIP. DRIP programs have several advantages over cash dividend payments:

• The stocks can be bought with only a small commission or no commission at all, sometimes even at lower than market value. This means that even a small amount of money can be invested at very little expense.
• Since each stock buys more stocks, which in turn buy even more, these programs have a compounding effect which can greatly multiply the investor’s wealth.
• These programs are very flexible, allowing investors to choose how much they reinvest.
• The automation of these programs makes them a very convenient way to make sure that you are investing regularly.

Compared to the market

The top dividend stocks almost always outperform the rest of the market, especially over the long haul. This was illustrated by a chart published by Ned Davis Research, which showed the performance of stocks from 1972 to 2008. Stocks that didn’t pay dividends gave an average annual return of 2.5%, whereas the average return of dividend-paying stocks was anywhere from 8.9% to 10.9%. In addition, in 2010, dividend-paying stocks outperformed stocks without dividends by more than 2.5%. This trend is predicted to continue in 2011.

Zach blogs about high dividend stocks and income investing. He previously wrote personal finance articles at moneyedup.com.