Dividends, Dividends, Dividends. Aside from investing in quality companies, Berkshire Hathaway CEO Warren Buffett is a big fan of dividend stocks.
The legendary billionaire investor knows that profitability is a good sign of a value stock. A better way to assess a company’s profitability is by looking at its dividend distribution to shareholders.
What is a dividend? When an investor buys shares of a company, they are essentially buying part of that company and they become partial owners. The investor, as a partial owner, is entitled to a proportional share of the company’s profits. These cash rewards (dividends) are distributed to shareholders on a monthly, quarterly, semi-annually, or annual basis.
Not all companies pay dividends though. In general, only companies that are profitable and have been for some time payout these distributions to shareholders. This is mostly because unprofitable companies or young companies looking to grow need the cash on hand to invest back into the business. Before continuing, it’s also worth mentioning that not all companies that pay dividends are quality companies. Some companies such as Real Estate Investment Trusts (REITs) are required by the Securities and Exchange Commission (SEC) to pay out dividends to shareholders and some companies will pay out dividends in an attempt to encourage investors to buy into the company.
