Dividend 25%. Will you get a return on your investment in 4 years?

I like writing about dividend stocks because it's one of the best legitimate ways to work towards passive income. But things are definitely not as rosy as they seem. And we'll use this example to show why!

Imagine finding a company with a dividend of, say, 25%. Or even 50%! After all, that means the company pays out half of its purchase price for the year. So, by simple math, we arrive at the fact that in two years we are at zero and can no longer lose money! At first glance, this looks interesting and in theory it is true. But the reality is often quite different. Let's take a look at why this is so.

But we have to start at the beginning.

A dividend is how companies return capital to shareholders. It is the portion of net profits for a given period that is paid out to shareholders. The decision to pay a dividend is made by the company's board of directors, usually from the previous period's profits.

The dividend is usually expressed as a dollar amount per…