What dividends are, and how they can rock your world

At some point, you may have heard the term "dividend" bandied about. Do you know what it means? It's really simple. When a company pays out some of the money it's made to its shareholders, this is known as paying dividends.

Not all companies pay dividends. Some choose to reinvest all their earnings back into the company. Certain industries are known for paying dividends. One example is the utility sector. Last year I started investing in my natural gas company's DRIP program. This doesn't mean water is leaking from the pipes. It stands for Dividend Reinvestment Plan. I made an initial purchase through the plan, and I make a small monthly purchase on an ongoing basis. There was only a small ($10) fee to start the plan. ALL my stock purchases are made with no trading fee or commission paid by me. You can also purchase partial shares, useful when you contribute a set amount every month. The company pays dividends quarterly, and you can either take them in cash, use them to buy more stock, or some combination thereof.

What made me interested in this is the yield. Stocks like this tend to be very stable. You are unlikely to get rich based on share price appreciation. However, the return via dividend is much higher than any savings account I could find right now. The stock trades at around $26, not much volatility. The dividend this year was $0.34 per share, paid quarterly, for most of the year (it went up to $0.345 for the 4th quarter). That means I made $1.36 for each share if I held it for a year. That's 5.2%! Try to find a savings account that pays anywhere near that. Now of course, this is a dividend, so it could be decreased or ended at any time. Also, the underlying asset is a stock, which could decrease in value or become totally worthless. However, as I said, utility stocks tend to be very stable. This investment represents less than 1% of my total portfolio, so I find the risk acceptable.

My goal is to continue investing like this, and by the time I retire (hopefully WELL before that) it will generate enough dividends to pay for my monthly gas bill. I plan to start doing the same for my electricity provider this year. I'd love to do the same for my phone/internet company, but they make you pays fees to trade, and I don't love that.

I hope you've found this interesting. I wish I'd known about dividends earlier. They can be quite cool.