What are Dividends?

Jun 7, 2018 | BEGINNER, INVESTING 101

Dividends are shares of profits paid out by companies to their shareholders on a regular basis. They can take the form of either cash or stocks. Typically only solid, blue-chip companies pay dividends. Since these companies’ stock prices stay relatively stable, offering dividends is one way for them to attract and retain investors.

Cash dividends are paid per share and are stated either as a dollar amount or a percentage of the company’s market value.

Stock dividends function the same way, except rather than pay shareholders in cash, companies issue additional shares to each eligible shareholder.

How much individual shareholders receive in either cash or stock dividends depends on how many shares they hold.

Dividends are typically paid out on a quarterly or yearly basis, but occasionally companies will offer a one-time dividend in the case of excess capital due to mergers, litigation, etc.

The amount shareholders receive in dividend payments changes based on the company’s performance, and companies who pay dividends may stop doing so at any time.

Dividends can be a great way for long-term investors to increase their holdings. If you were to reinvest your dividends, for example, you would compound your investment. You would own more shares without coming out of pocket, and the more shares you own, the more your next dividend payment would be, and so on, and so on.

Many investors retire and live completely off dividend payments, never touching their principal investment.
DRIPs (Dividend Reinvestment Plans) offer a convenient way for investors to automatically reinvest any monies received as dividends. Not all brokerages offer this service, however, and investors are taxed on all dividend payments, even if that money is reinvested. In other words, if you reinvest your dividends, you will be paying tax on money you never actually receive. But, due to the nature of compounding, those who reinvest their dividends tend to earn much more than they pay in taxes.

You should consider including dividend stocks in your investment strategy as they are an important part of a well-balanced portfolio and provide opportunity for compounding growth.