Why Do Companies Pay Dividends? And Are High Yield Dividend Stocks Actually Good?

The word "dividend" gets thrown around a ton, but what does it actually mean, and why do companies pay dividends? In this video, we break down the different ways companies decide to allocate capital, why companies pay dividends, and how dividend reinvesment plans (DRIP) work We also dig into some core metrics investors need to watch with dividend stocks -- dividend yield and payout ratio. Dividend yield is the annual dividend payments divided by the price for one share of the company's stock -- it gives you a sense of the return you'll earn even if the company's share price stays flat. Payout ratio is a measure of how able a company is to continue paying its dividend. It is calculated by dividing a company's annual dividend payments by its net income. Investors interested in good dividend stocks might want to start their search with the dividend aristocrats. These are stocks that have consistently raised their dividend every year for at least the past 25 years. They have been able to do that because they have strong businesses that are able to shift with trends and weather economic downturns -- and really those are some of the most important attributes of a good dividend payer.