A stock dividend is a payout offered by a publicly-traded company to eligible stockholders. The payout is a calculated portion of the company’s profit that stockholders can benefit from. It is important to understand that not all companies will offer their stockholders dividends. The company’s board of directors usually determines the dividend, and they base it on factors such as financial and economic indicators. When they are paid, dividends are paid in cash, which is often sent to stockholder’s bank accounts on a monthly, quarterly, and yearly schedule.
New investors can use a calculator for dividends to understand how much they will earn on their shares.
Investors should understand that dividends are offered at the discretion of the board of directors for the company. If the board sees it fit to offer current shareholders a payout of the company’s profits, then these are made out to all shareholders on a set schedule.
Stocks or mutual funds that offer dividends form an investor’s foundational stock in their portfolio because they are usually stable and consistent.
Investors should also be aware that extremely high yields in the stock market often illustrate an inverse relationship between the stock price and dividend yield as well as the distribution. This means that the stock dividends may not be sustainable.
The only disadvantage is that stocks that offer dividends do not often outperform higher-quality growing stocks.
What Is a Dividend Yield
Investors must understand the basics of dividend yields to maximize benefits. As the stock’s price increases, the stock’s dividends actually decrease. The dividend yield is defined as the ratio of the amount of cash the investor receives from each dollar they invested in the stock.
A higher stock price does not correlate to a higher dividend yield. The stock price and dividend yield have an inverse relationship, and dividends are usually paid on a per-share basis. The number of shares an investor owns in a corporation will be the basis for their dividend distribution.
How Dividend Stocks Work
The easiest way to understand is through an example. If you purchase 100 shares in a company at $10 and the company directors pay an annual 0.30 dividend, it will give you 1000 shares.
At the end of the year, you will have received $30 from the company in dividend payments. That is a 3% yield offered by the company. This dividend will be paid off whether the company’s stock is up or not.
Dividends are cash payouts that investors can reinvest to purchase more shares or shares in a different company. Other investors choose to save the cash or spend it to celebrate.
Dividends are predictable payments but investors should diversify their portfolio and purchase stocks that allow them to get paid regardless of the economic situation as COVID-19 demonstrated.
When to Buy or Sell Dividends
To earn the dividends, shareholders are required to meet certain requirements set forth by the board. Some of these may be that the shareholder must be a shareholder on record on a date set by the board to qualify.
Investors should understand that stocks are also called trading ex-dividend, which means the stock is trading on that day without dividend eligibility. This means that if investors buy or sell that stock on that particular date that the stock is set to “ex-dividend” they may not receive the most current payout for the dividend.
Assessing the Best Dividend-Paying Stocks
New investors should be able to properly assess whether a dividend stock is a good investment. The first thing to note is that dividends are derived from the stock of a company’s profits so investors can assume that the company is performing well.
New investors benefit from buying dividends from companies that are established and have a good history of paying good dividends. These stocks add stability to the investor’s portfolio. If an investor invests $10,000 in a corporation and this is held for a year, the investor will earn $11,000 if the stock price remains the same. If the stock price decreases after the $100 purchase per share, to say $90 per share, the total investment after dividends will still break down to $9,000 of the stock value plus $1,000 in dividends.
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