The secret is out: dividend investing works. It wasn’t too long ago, that dividends were considered too boring. But the bursting of the tech bubble, and the Great Recession of 2008-2009, changed investor sentiment, perhaps for good.

Dividend stocks were once referred to as “widow and orphan” stocks. Now, investors of all age groups have discovered the appeal of dividend stocks. Dividends offer income that investors can choose to spend however they want—for example, to help supplement a retirees’ income, or to buy more shares of a company and grow dividend income over time.

Dividend reinvestment in particular is one of the greatest ways to build wealth, because it unleashes the power of compounding interest.

For example, there are the Dividend Achievers, a group of 265 stocks with 10+ years of consecutive dividend increases. You can see the full Dividend Achievers List here.

To investors just getting started, the concept of dividend investing can be overwhelming. This article will discuss the basics of dividend investing, the important things to keep in mind when buying dividend stocks, and how to go about getting the process started.

What Are Dividends?

Dividends are a portion of a company’s earnings that are distributed to investors who own the stock. A firm may decide to pay a dividend to shareholders, after all expenses are paid. Dividends are paid on a per-share basis, and are usually expressed as a percentage, which is called a dividend yield. The dividend yield is calculated by dividing the annualized dividend payment by the current share price. It shows how much income will be generated from a stock, as a percentage of the initial investment.

For example, McDonald’s (MCD) has an annual dividend of $3.76 per share. The stock closed at $129.96 per share on April 7, meaning its current dividend yield is 2.9%. If an investor were to buy $10,000 of McDonald’s stock, at the present dividend rate, the stock would generate $290 in dividend income over the next year. The great thing about dividend stocks like McDonald’s, is that they raise their dividends over time. McDonald’s has increased its dividend each year since it paid its first dividend in 1976.

Increasing dividends over time result in higher levels of income for the investor. Five years from now, the investor who bought McDonald’s would receive roughly $370 per year in dividend income. And, the result would be even higher, if the investor reinvests the dividends along the way, to purchase additional shares.

Not all stocks pay dividends. Instead, many companies prefer to use excess cash flow to reinvest in the business, make acquisitions, repurchase stock, or pay down debt. For investors wondering where to look for the best dividend stocks, the lists of Dividend Achievers and Dividend Aristocrats are good places to start. Companies that have maintained long histories of increasing their dividend payments each year, have demonstrated that they have time-tested business models.

In addition to the Dividend Achievers, investors should look into the Dividend Aristocrats, an even more exclusive group of companies in the S&P 500, that have raised dividends for 25+ years. You can see the entire list of Dividend Aristocrats here. Typically, large companies are among the most reliable dividend payers. These are classified as large-cap stocks, which generally have market capitalizations of $10 billion and above.

Small companies tend not to pay dividends, because they are more focused on growth. That said, there are a number of small-cap stocks that do pay dividends. For example, water utility American States Water (AWR) is a small-cap, with a market capitalization of $1.6 billion, and it has increased its dividend for the past 62 consecutive years.

Dividend yields can vary. Investors can find dividend stocks that yield below 1%, to double-digits in some cases. High dividend yields are enticing, but investors need to perform proper due diligence before buying, to ensure that the payouts are sustainable. An extremely high dividend yield of 10% or more can often be a sign of upcoming danger. Such a huge yield indicates that the market doubts the company’s financial position, and whether the dividend will remain intact.

Dividend Payers vs Non-Dividend Payers

Just because a stock pays a dividend does not necessarily mean it is automatically a better investment than a stock that pays no dividend. Start-up companies, or those generally earlier on in their development, will rarely pay a dividend. These types of companies need to reinvest as much cash flow as they can back into growth initiatives, to get the business off the ground. So don’t expect Snap, Inc. (SNAP), which held its initial public offering earlier this year, to ever pay a dividend to shareholders.