There are two reasons to invest in stocks, the prospect of Capital Gains and the distribution of Dividends. Capital gains are achieved when an investor sells stocks that appreciated in value, however most investors seeking capital gains fail to beat the overall market. Dividend stocks on the other hand, don’t need to be sold to generate income, and often have a higher rate of return than the overall market.
I recently purchased stock in Microchip Techology (MCHP) at $36 a share. Microchip is a semiconductor manufacturer based in Arizona, and for the purposes of this post, MCHP has a 3.61% dividend yield as of the end of the trading day 7/7/11.
Why Dividends, Why Now?
Companies that pay out dividends are generally profitable and in sound financial shape, so as to be able to pay a dividend. A dividend centric investing strategy represents a relatively stable source of income at a lower risk, often with higher returns than capital gains. Additionally, as a stock prices go down, the dividend yields rises, make it a more a stock a more appealing buying opportunity. Finally, in the event of a long drawn out recession, parking your money in a dividend playing stock gives you an income stream while waiting for the stock price to increase.
How do Dividends work?
The key date for getting paid a dividend, is the Ex-dividend Date, anyone who owns a company’s stock on that date will be paid a dividend. Dividends are paid either on a quarterly basis or on an annual basis, Microchip offers a $0.35 quarterly dividend, therefor 35 cents will be paid out for each MCHP share owned, 4 times a year. The better way to think of dividends is as a percentage of the stock value, called the Yield. For MCHP, the yield which is measured on a annual basis is 3.65% or (0.35/36)*4.
