For those who are new to investing, let’s make sure we’re on the same page. Buying stock means taking an ownership stake in a company. Companies reward their shareholders in several ways. The way that grabs the most headlines is by increasing the value of its stock price.
Companies do this by delivering revenue and earnings that grow on a quarterly and/or annual basis. This generates interest from other investors and the stock price goes up. And if a company is still in a growth phase, the capital growth may outpace that of the broader market.
However, if a company is in a more mature phase of its business, it may not post market-beating gains. That’s where a dividend comes in. Companies that issue a dividend are distributing a percentage of its profits (known as the payout ratio) to investors as a dividend for owning the stock. Many companies pay a dividend every three months (i.e. a quarterly dividend). That means that investors earn this dividend on a regular schedule no matter what is happening with the company’s stock price.