The quiet hero of investing: Dividends

Many new investors that start buying stocks think that the only way to earn money on the stock market is by buying and selling shares. Although that is one of the primary ways of earning money on the stock market, there is a secondary tool that, if used correctly, can exponentially grow your money on the stock market.

That tool is known as dividends.

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For those of you that do not know, when you buy a stock (also known as a share) of a company, you are purchasing a small percentage of a company. Because of this, you may be entitled to a portion of the companies profit. This portion of the profits can be paid out to you by way of dividends.

Now, not all companies pay out dividends to their shareholders. The main reason they may not payout to their shareholders is that the management team wants to reinvest the companies profits back into the company.

For tech companies, this is pretty commonplace, as research and development are crucial to the longterm success of the company.

As for sectors that tend to pay out dividends, look for REITs, utilities, and banking organizations.

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Now that we have a basic idea on what a dividend is, let me introduce you to something called a DRIP. DRIP stands for Dividend-Re-Investment-Plan. The idea is that with every dividend you receive from a company, you use the funds to buy new shares. As you do this, you earn more and more, year after year from your dividends. This concept is very similar to the concept of compounding interest (click the here if you want to learn about compound interest).

What is your favourite stock that pays dividends?

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