When the market is volatile, or falls into an extreme down-trend like we saw the last six months, dividend sound investing can be the difference between holding gains and catastrophe in a portfolio. The Coca-Cola Company (NYSE:KO) is a great example, and we'll look at what impact that has made on Coke's investors below.

Understanding stock dividends

Companies that make profits can do two things with the money: Hold on to it to re-invest in the company, or give it back to its shareholders. When a company holds onto the money, it is said to "retain earnings." It then uses the money to buy new technologies, develop new products or invest in new efforts to grow the business.

Note: For more education-based articles like this, be sure to read our Investment Choices and Account Types article.

When a company decides to give profits back to the stakeholders, it does so in the form of dividends. Dividends are divided back to shareholders per share. So a company offering a .10 dividend is giving ten cents per share back to shareholders. If you owned 10,000 shares, you'd be paid $1,000.

Some companies pay dividends regularly, others do so randomly, while others don't pay dividends at all. The Coca-Cola Company (NYSE:KO) pays dividends very regularly, usually quarterly (example below), and has paid at least .30 per share since 2006. Many charting applications will put a small "D" icon on the chart to indicate the date a dividend was paid.

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Dividends in your portfolio

Some investors argue that companies that pay dividends are lacking in innovation, otherwise they'd keep the money and reinvest it. But that's a broad brush to paint by.

Many disagree, and say that a company that pays dividends to its shareholders has high regard for their investors, and shows it by returning them value. The fact is, there are many companies which pay dividends that are also sound financially and will see continued growth.

In a down market, dividends can lessen the pain of declining stock values. As a for-instance let's assume you had purchased Coca-Cola (NYSE:KO) at the beginning of 2007. The price would have been $48.62. Since then, the price has dropped to $42.92, or a loss of $5.70 per share.

If you'd have purchased 500 shares at that time, your loss would have been over $2,800 on the stock alone.

But with Coca Cola's dividends, the losses are lessened considerably. The company has paid a dividend regularly for years, even in the midst of a major economic down-turn and a major slide in stock prices. Over the time you'd have owned the stock, KO would have paid you $1,645 in dividends, thus cutting your loss in the stock price by more than half.

You can earn dividends...and easier than you think

There are many tools available to find good dividend returning stocks, and if you're buying and selling stocks on your own, we strongly encourage you to make dividends a factor when you're considering good prospects.

But one of the things we discuss in our articles and videos is the fact that building your own mix of stocks can be difficult and time-consuming, and ETFs offer an alternative that's less demanding. Luckily, many ETFs offer solid dividend returns, and there are even ETFs that are built around good dividend-paying stocks.

We discuss that next in Dividends or Growth: Do You Have To Choose?