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Investing for Beginners

Dividends 101 - The Beginner's Step-By-Step Overview of How Dividends Work

By , About.com Guide

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Take a Dive into the Rich World of Dividend Investing
Cash dividends represent money distributed from a company's profit.

When a company earns a profit, it has several options, one of which is to distribute some or all of the cash to the owners (the stockholders) by mailing checks out from the corporate treasury. These checks are known as dividends.

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Have you ever wondered what it would be like to sit at home, reading by the pool, living off dividend checks that arrive regularly through the mail? Before you can even hope to achieve that level of financial independence, you must understand what dividends are, how companies pay dividends, and the different types of dividends that are available such as cash dividends, property dividends, stock dividends, and liquidating dividends, just to name a few.

That's why I put together this step-by-step Dividends 101 resource. It will walk you through the basics, ensuring that you have a solid foundation before diving into the more practical content in our Ultimate Guide to Dividends and Dividend Investing. By starting here, you'll learn to avoid tax traps such as buying dividend stocks between the ex-dividend date and the distribution date, effectively forcing you to pay other investors' income taxes! You'll also learn why some companies refuse to pay dividends, how to calculate dividend yield, and how to use dividend payout ratios to estimate the maximum sustainable growth rate.

Clear off your desk, grab a pen and notepad, and get a cup of coffee. You're about to embark on a journey that will put you years ahead of other new investors on understanding dividends and the important role they plan in your investment portfolio.

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