Why do Companies Give Dividends?

Dividends are cash or stock rewards paid to investors, usually out of company profits. You can almost think of it as a gift, meaning companies are under no obligation to hand out dividends, and most don't.

But look carefully at that gift. The company might be handing shareholders a cut of the profits because it's in a mature business that isn't growing fast, such as a utility. On the other hand, on-the-rise companies (known as growth stocks) prefer to reinvest their profits into company expansion. And if the company's stock price is surging, this strategy makes more sense.

That doesn't mean dividend stocks are a bad investment—the company might be showing solid profits—but it could mean its stock price is aiming more toward the horizon than the moon. Such companies often attract investors with the promise of regular quarterly dividends, which can really boost their portfolios when the stock market is stuck in a rut.

By now you may be wondering which is better: slow-and-steady dividend stocks, or speedy growth stocks. As is so often the answer in investing, you may want to cover your bets by owning a mix of both.