How Does Stock Dividend Work?
Stock dividends…well what are they? To think of a stock dividend in the simplest terms, all we have to do is look at the root word of dividend…”Divide.” That is literally all a stock dividend is. A payment a company makes to share or DIVIDE profits with its stockholders.
However, you must be advised that not all stocks pay dividends. The concept of stocks can be intimidating to many; however, how dividends work is pretty simple.
Basically, for each share of stock, a dividend is paid. Determining annual cash earnings requires a simple multiplication equation. For example, if an individual owns 40 shares in a company that pays $4 in yearly cash dividends, the individual will receive $160 per year (40×4=160). See how easy that was?
Types of Dividends
Primarily dividends are paid out on a company’s common stocks, and there are five main types of dividends: cash, stock, Dividend reinvestment programs (DRIPs), special and preferred.
Cash, the most common, is cash generally paid directly into the shareholder’s account.
Stock, rather than cash, investors are able to be paid with additional shares of stock. Often at a discount.
DRIPs are able to reinvest any dividends received back into the company’s stock.
Special, unlike other types of dividends, do not recur. These are often distributing profits that have piled up over years with no immediate need.
Preferred which functions more as a bond than a stock and are generally fixed.
Companies usually pay dividends quarterly, and the company’s board of directors must approve each dividend. The company also determines when the dividend will be paid, the dividend amount, and the ex-dividend date.
What’s an ex-dividend date? Well, for starters, it is extremely important for investors. To receive the dividend, investors must own the stock by the ex-dividend date. Investors will be ineligible to receive the dividend if they purchase the stock after this date. However, investors who sell the stock after this date are still entitled to receive the dividend.
Why Buy Stock Dividends?
First and foremost, they can provide a stable income stream as they often increase annual increases that help outpace inflation. America’s most reliable companies are known for their record-growing dividends that have not faced cuts for decades. The expectation is that even through rough times, company dividends will be maintained.
It is also equally important to understand dividend safety. To determine the security of a dividend, one should consider the payout ratio. Ultimately, investors seek payout ratios 80% or below because If a company pays out 100% or more of its income, the dividend could be in trouble in the long run.
Now, you must decide if you want dividend stocks in your portfolio or not. I love a little bit of both dividend stocks and non-dividend stocks. The truth is you have the power and now the education to make the best decision for you and your family.
NOW, LET THE OFFICIAL “How Does Stock Dividend Work?” PARTY BEGIN…
DIVIDENDS OVER HERE. DIVIDENDS OVER THERE.
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****We are not certified financial advisors. But, we are INVESTORS. This is for information purposes only. Now, let the FINANCIAL PARTY continue…