Investing Assets & Markets Stocks The Ultimate Guide to Dividends and Dividend Investing By Joshua Kennon Joshua Kennon Twitter Website Joshua Kennon is an expert on investing, assets and markets, and retirement planning. He is the managing director and co-founder of Kennon-Green & Co., an asset management firm. learn about our editorial policies Updated on July 12, 2021 Reviewed by Charlene Rhinehart Photo: gorodenkoff / Getty Images The idea of collecting checks for the rest of your life and generating passive income can be very compelling. If this sounds like the type of investing strategy that appeals to you, you may want to learn more about dividends and dividend investing. This guide to dividends was designed as part of the guide to investing in stock to help answer all of your questions and walk you through the basics step-by-step, from how to select investments to enrolling in dividend reinvestment programs. A Step-by-Step Guide to Understanding Dividends If you're new to dividend investing or just want a refresher course, this step-by-step guide is the perfect place to start. It explains the three dates that matter to dividend holders, and it offers explanations for cash dividends, the dividend yield, and how dividend reinvestment programs work. It is a one-stop place for new investors to get a great education. Discover everything you need to know about dividends and dividend investing. What Is Dividend Investing? Dividend investing is based upon building a collection of so-called "safe" blue chip stocks with large, regular dividend yields that generate money throughout the year. Dividend investors have the pleasure of seeing regular cash deposits appear in their brokerage account or bank account. Take a few moments to learn the characteristics some investors believe are part of good dividend stocks. Don't Just Buy the Highest Dividend Stocks If you're a dividend investor, you can't just pick the stocks with the highest dividends. That may seem counterintuitive, but there is often a reason why high-dividend stocks pay out so much. There could be problems with the underlying business, or the dividend payout ratio is much too high and threatens future growth. The firm may have a debt-to-equity ratio that makes investors believe the company can't survive in the long run. Take a few moments to discover some things to consider when finding the highest dividend stocks for your investment portfolio. Why Not All Stocks Pay Dividends With research suggesting that dividend stocks outperform non-dividend stocks, why don't all companies pay cash dividends on their shares? In this article, you'll understand some of the reasons a company's board of directors may decide to hold off on dividends and instead reinvest in the business, pay down debt, or acquire another firm. Find out the reason not all stocks pay dividends. If a Stock Doesn't Pay Dividends, How Can It Be Worth Anything? If a stock doesn't pay dividends, how can it be worth anything? This is a question often asked by new investors. To help you really get down into the details and understand non-dividend paying stocks, there is a story that will make this topic easy to grasp. It starts with a fictional company, American Apple Orchards, Inc. You'll see how, despite paying no dividends, the company could still make its owners millionaires. Cash Dividends vs. Share Repurchases Which is better for you as an owner of a business: cash dividends or share repurchases? This is an extremely important question because one method is more tax efficient but the other requires less trust in management. To find out the important things you should ponder when deciding on a dividend paying stock, take a moment to briefly consider these factors. How the Dividend Tax Works and Dividend Tax Rates The dividend tax sometimes confuses new investors because there are "qualified" dividends and "non-qualified" dividends. This overview explains how the dividend tax works and the individual dividend tax rates that may apply to the money you earn from your stocks or other cash-generating assets. Keep more cash in your pocket by taking the time to read this article. The Dividend Trap and How to Avoid It Sometimes you might find a stock that appears to be offering huge cash dividends and paying yields that are several times the interest rate available at your local bank. Take a moment, calm down, and proceed with extreme caution. You may have just spotted a dividend trap. Find out how to avoid dividend traps. Dividend Stocks Perform Better Than Stocks With No Dividends Respected professor Dr. Jeremy Siegel has proven in his research that 97% of the gain investors experience after inflation comes entirely from reinvested dividends. In this special feature, you'll see how that's possible, discover statistics on just how rich investors of the past have become by owning dividend stocks, and learn of Siegel's "principle of investor returns," which he believes is responsible for a stock outperforming the market. Find out why boring dividends could be your new best friend. Use Dividends to Recover From Big Losses If you have suffered a devastating blow to the value of your investments, 401(k), or stock portfolio, you may be able to use the combined power of dividends, dividend reinvestment, and dollar cost averaging to rebuild your assets over the next five to 10 years. This article was designed to help you understand the process and point you in the right direction to take back control of your tattered finances. Learn how to rebuild your portfolio and recover from losses with the help of dividends. Dividend Stocks Tend to Fall Less During Market Crashes Did you know that a portfolio full of dividend stocks is likely to fall less during a market crash than non-dividend paying stocks? To find out the four reasons this is true, take a moment to read this great explanation. Using Dividend Yields to Tell If a Stock Is Undervalued or Overvalued One strategy used by professional investors involves comparing dividend yields to other investments to determine if the stock market is expensive or cheap. It will take you less than thirty seconds to learn this method, and it will empower you to better understand the risks you are taking when buying individual stocks or index funds. Learn how to use dividend yields to value stocks. How the Financial Press Misleads Investors on the Role of Dividends Did you know that stock charts have one fatal flaw that can mislead you and cause you to arrive at bad investing decisions? In fact, stock charts may be responsible for the rise of what some call the capital gains cult. New investors mistakenly focus on rising share price, not understanding that most long-term gains come from dividends that are reinvested into additional shares of stock. Over time, the power of compounding leads to you owning a much larger percentage of the company, even if the share price has only moved a few percentage points each year. You deserve to know the truth. Take a moment to read how the reporting system is gamed against you and why focusing on total return can lead to better results. Your Step-By-Step Guide to Putting Together an Income Investing Portfolio If you've ever dreamed of living off your money, dividends are a big part of making that dream a reality. This ten-page, step-by-step guide is filled with insightful information about how to begin putting together a collection of assets that will bring enough money into your life for you to live off the interest, dividends, and rents you receive instead of having to sell your labor for a paycheck. Start living the dream by learning about income investing. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Jeremy Siegel. ”The Future for Investors: Why the Tried and the True Triumphs Over the Bold and the New,” Page 126. Crown, 2005.