Stock analysts talk about them often and investors love them, yet what exactly are they? Let’s have a crash course on what dividends are and how they can help you and your stock portfolio.
A dividend is a specific amount of money paid to you on an annual or quarterly basis from the company’s profits. Think of it as…well, sharing the wealth.
Though there are several types of dividends, the two most common uses in the stock market are cash dividends and stock dividends.
- A cash dividend is when the company pays their shareholders in the form of cash payments (most common).
- A stock dividend is given to the shareholder by the company increasing the current amount of shares by percentage.
Find more details about cash and stock dividends here.
Dividends are paid to investors on a quarterly basis (four times a year). Yet, depending on the company’s board of directors they can be scheduled to be paid once a month, semi-annually (twice a year), or annually (once a year). There are also times when a company may choose to not set a particular schedule and may randomly, this is also known as “irregular dividends”.
But Wait…There’s More
Dividends within a company are managed at the discretion of the board of directors and may be increased, decreased or eliminated at a time of their choosing. Dividends are also taxed at long-term capital gain rates.
Please see a certified tax consultant for additional information on taxes and if your dividends are “qualified or “non-qualified”. View more tax information here.
Dividends to some investors are a sign of “financial health” for a company. Investors can create a customized dividend schedule or algorithm to support their current income or support their income for retirement. This schedule is customized to receive dividend payments from companies in a systematic fashion (payments made daily).
If you want to buy a stock in time to catch their dividend payment, you must buy before the company’s ex-dividend date. Find more information here.
Not For Everyone
Though most investors enjoy dividends, not every investor concentrates on having a dividend portfolio. It’s also not common for startups and higher-growth companies to have dividends. Startup companies are in their “new years” and revenue will fluctuate from quarter-to-quarter. This may be a time when these new businesses need to keep their profits to reinvest. And higher-growth companies (big corporations) may not use dividends so they can reinvest and use the extra cash flow to fund new projects.
Dividends are a wonderful tool and when used responsibly, they can make you very wealthy. Be wise about all of your investments and enjoy the wealth.
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