One term investors should familarize themselves with is the word “dividends.” From high dividend stocks to dividend payout ratios, the word is a mainstay in the world of investing. One of the ways an individual can make money with stocks is by investing in companies that pay dividends.
Simply put, a dividend is a distribution of a portion of a company’s earnings, which is decided by the board of directors, and given to a select group of shareholders. It is normally quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percentage of the current market price, referred to as dividend yield. A dividend may also be considered as a mandatory distribution of income and realized capital gains made to mutual fund investors.
Knowing what dividends are and how companies pay dividends, and the different types of dividends that are available is a good starting point.
There are many different types of dividends although most are familiar with stock dividends; there are also cash dividends, property dividends, stock dividends, and liquidating dividends, among many others. It is also important to know that dividends may come in a fixed or variable form. Dividends that pay at a fixed rate go to owners of preferred stock, while variable dividends go to common stock holders.
A stock dividend is paid as additional shares of stock rather than as cash. If dividends paid are in the form of cash, those dividends are taxable. When a company issues a stock dividend, rather than cash, there usually are not tax consequences until the shares are sold. In comparison, a cash dividend is a dividend paid in the form of cash, usually by check.
A stock that yields more than a 5 percent dividend is generally considered a good investment. But one should also be concerned during periods of market volatility, because they may not yield as big a profit when money market yields are low. This means that just because a company is perceived to be “good” or “stable,” does not mean they will produce the investment outcomes one may desire.
Like all investments, they still carry a risk, however, since the 1960s, dividends have provided about one-third of the total return for the S&P 500.
–torrance stephens, ph.d.
