- A dividend is a payment in which a company distributes a portion of its earnings to stockholders. These payments are usually made in cash, but they can also be shares of stock or other property.
How do Dividends work?
To receive dividends, someone must first purchase stock in a company. Stocks represent how much of the company a person owns, and they are measured in shares.
The amount of money that a stockholder receives in dividends depends on how much the company earned, as well as what percentage of the earnings the company agrees to pay per share. If someone owns ten shares of a company that pays $1 per dividend, for instance, that person will receive $10.
Privately-held companies do not make shares available to the public. Public companies, on the other hand, do.1
How often do companies pay Dividends?
How do companies pay Dividends?
To pay dividends, a company will issue a press release after deciding how much of its earnings it will distribute. The press release will include a date—called a “record date”—by which stockholders must have purchased their stock to qualify for a dividend. It will also include a “payable date,” which is when the company will deposit funds to the Depository Trust Company to pay to stockholders.4
Do all companies offer Dividends?
No. Not all companies pay dividends to stockholders.
Which companies offer Dividends?
For a long time, the rule of thumb was that older companies paid dividends and younger companies did not. The reason is that companies that do not pay dividends are usually young and fast-growing. Instead of paying dividends, they reinvest their corporate earnings back into the company to fuel growth. Stockholders benefit because the value of their shares increases as the company grows.
By contrast, companies that pay dividends are typically older and well-established, and their growth is slow but steady. But many of these companies no longer pay dividends either. Instead, they argue that just like young, fast-growing companies, their earnings should be used for growth, which will boost the value of their shares for stockholders.5
How are Dividends taxed?
Dividends are taxed at different rates depending on whether they’re “qualified” or “nonqualified.” Qualified dividends are taxed more favorably, as they’re subject to long-term capital gains rates, while nonqualified dividends are taxed at ordinary income tax rates.6
Dividends are considered “qualified” if they meet three criteria:
- They must be paid by an American company or a qualifying foreign company.
- They cannot be listed by the IRS as dividends that do not qualify.
- The stockholder must own them for more than 60 days out of a 121-day holding period.7
Are there any dangers associated with Dividends?
Purchasing stocks that pay dividends is an investment and it comes at a risk. There’s no guarantee that the stocks will increase in value, or even retain their original value. If a company goes out of business, any shares that a stockholder owns will be worthless.
Investors should thoroughly research companies before purchasing stocks. Also, by buying stocks in several companies, stockholders are at less of a risk of losing all their money if one of them goes out of business.
- “What's the difference between publicly- and privately-held companies?” Retrieved from http://www.investopedia.com/ask/answers/162.asp
- How and when are stock dividends paid out? Retrieved from http://www.investopedia.com/ask/answers/102714/how-and-when-are-stock-dividends-paid-out.asp.
- Fonda, Daren. (2016, August). 12 dividend stocks for every month of the year. Retrieved from http://www.kiplinger.com/slideshow/investing/T018-S004-great-stocks-to-get-dividends-every-month/index.html
- How and when are stock dividends paid out? Retrieved from http://www.investopedia.com/ask/answers/102714/how-and-when-are-stock-dividends-paid-out.asp
- What is the incentive to buy a stock without dividends? Retrieved from http://www.investopedia.com/ask/answers/135.asp.
- Guide to taxes on dividends. (2016). Retrieved from https://turbotax.intuit.com/tax-tools/tax-tips/Investments-and-Taxes/Guide-to-Taxes-on-Dividends/INF19201.html.
- IRS. Dividends and other distributions. Retrieved from https://www.irs.gov/publications/p17/ch08.html#en_US_2016_publink1000171596.