Dividends are payments that a company makes to its shareholders. Dividends are usually paid on a quarterly-basis (every three months). If you own their stock you will get some cash on the side from them. This cash gets deposited to the account where you hold the stock.  If a stock pays a 5% dividend, then we are being paid 5% of the value of the stock just for owning it. One exciting possibility is that if this stock were to one day double in value while the dividend stays the same, we collect 5% on that increased value – which to us is really 10% of our initial investment, annually.

Dividends can provide a sense of security or a limited “insurance” against losses. If in two years the stock lost around 10% in value and the annual dividend is 5%, we are not that concerned because we haven’t lost much money. Also, stocks that pay dividends tend to be less volatile. A large part of its shareholders are in it for the dividend and hold onto to the stock for longer periods of time.

For a retirement or long-term investment, some of the most successful and respected investors recommend accumulating stocks that pay dividends. People who have invested in the big famous dividend paying stocks such as Exxon, Pepsi, Coca-Cola, McDonalds etc (you know, those huge companies that have been around forever and will probably be around forever) decades ago are likely to be collecting pretty nice dividends today.