I will keep this very simple. When a business wishes to raise money beyond what it can do from selling a product or performing a service, it will either issue common stock, preferred stock, or bonds. Though there are undoubtedly Dividend Kings with outstanding bonds and preferred stock, this portfolio will be built from the purchase of common stock or shares.
Common stock is an asset that represents ownership in a business. Shareholders can vote to elect the board of directors or to enact corporate policies. However, they are low on the totem pole. In the event a business decides to give up the ghost and liquidate its assets, bondholders, creditors, and preferred shareholders will be paid in full before common shareholders get a dime.
The good news though, is that common stock is a very liquid asset and can be traded on exchanges and may be bought and sold by investors. It is also easy to understand. It doesn’t have the complex and contingent provisions of bonds, preferred stocks, or warrants. And, being part-owners of the company, common shareholders have a residual claim to a company’s ongoing and future profits. Those profits might not be reinvested into different projects, but rather paid as dividends to shareholders. And that is the story behind the following definition from Investopedia.
A dividend is the distribution of a company’s earnings to its shareholders and is determined by the company’s board of directors. Dividends are often distributed quarterly and may be paid out as cash or in the form of reinvestment in additional stock.