Dividend Income, what is it? Dividends, in their conventional sense, are simply a distribution of earnings to shareholders often in the form of cash. Dividends are an excellent way to earn money from your investments without needing to sell any of one’s portfolio.
Other than paying dividends, there are several other things that most companies do with their earnings before paying a dividend to a shareholder. They can keep the earnings to pay off debt, stockpile money for when it might be needed later, or expand their operations and reinvest it in themselves. After the money has been properly organized then a dividend is payed. Most dividends pay an average of between 1% and 5% of the stocks worth in a year.
A few companies are required to pay out a minimum amount in dividends by law. For example, Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs) are required to pay out at minimum 90% of their net income to shareholders and investors.
A dividend based portfolio, one that specializes in dividend income is simply a portfolio of stocks and mutual funds that pay a large dividend percentage. The pros of this method of investing is it is easy to retire on and does not require the selling of ones assets. However, dividend based portfolios are often not very growth friendly due to the companies passing on most of their earnings to the investor instead of reinvesting it into themselves.