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A Simple Free Money Secret That Every Investor Should Know About.

What are dividends?

To the patient and disciplined investor who stays the course during stock market storms: rejoice! Your pay month has arrived. December is usually considered a major dividend-paying month. Happy dividend-paying month! But what are dividends?

What are dividends?

In a previous post, we outlined two powerful engines that propel stock market wealth: capital gains and dividends. Dividends are essentially FREE money the stock or mutual fund gives you back for simply owning the stock or mutual fund. Think of dividends as the stock or company sharing its profits with its shareholders. There are dividend stocks (stocks that pay dividends) and dividend funds (funds that pay dividends, such as mutual funds and exchange-traded funds). Since mutual funds are composed of a "basket" of stocks, the fund will add up dividends received from each constituent stock to come up with a final dividend amount. Keep in mind that each constituent stock may issue dividends at different times. Also, understand that not every stock issues dividends.  

When are dividends issued?

Dividends are usually issued quarterly (every 3 months), but some companies or funds may pay dividends semi-annually (two times a year) or annually (once a year). For example, if a mutual fund pays $0.20/share every quarter and you own 100 shares of the fund, your quarterly dividend payment would be $20 or $80 for the whole year. 

What should you do with your dividends?

When you receive dividends from a stock or mutual fund, you have one of two options: buy more shares of the stock or mutual fund or cash out and pocket your earnings. Every investor has different investment style or objectives. Therefore, what you do with your "free" money is entirely up to you. 

[Related: 3 high-yield dividend stocks for the cheap investor.]

The bottom line

Nobody likes to see the common ebbs and flows or large stock market losses, but those who stay the course will always emerge victorious in the long run. One way calm and disciplined investors get rewarded is through dividends (or profit-sharing). If the company (stock) or mutual fund is profitable, it may decide to share the earnings with its shareholders. How will you use your dividends? Let us know in the comment section. 

Please share this article. Here are a few other articles you may find useful: 15 mind-blowing habits to make you super rich. One will spice up your marriage4 smart ways to both invest and pay down student debt | A simple portfolio to supercharge your returns | How to invest $50 | 10 shocking reasons why you will be broke at retirement.

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