What is a Dividend? A Simple Explanation + 4 Tips
What is a dividend?
Whether you are just starting to invest or have been investing for decades, dividends can be a valuable part of anyone’s investing portfolio.
What is a Dividend?
Generally speaking, a dividend is a distribution of a portion of a company’s earnings paid to the shareholders. Dividends can provide income and growth for long-term investments.
Why Companies Pay Dividends
Many companies that payout dividends are well-established and stable companies. By paying a dividend, they attract investors creating more demand for their stock.
Why Companies Don’t Pay Dividends
Many companies won’t pay dividends for several reasons, the biggest being it hurts their bottom line. That is much less cash the company has and is therefore much less valuable when paying out dividends.
How Do You Earn A Dividend?
Earning a dividend is an easy feat to accomplish. The company will automatically pay to your brokerage account at distribution time by buying a stock or mutual fund that pays out dividends.
When Do Companies Payout?
In most cases, companies pay dividends four times a year every quarter. However, companies can decide to pay out dividends at different intervals if they like. Monthly or yearly dividends are two other less common options.
Dividend Tax Benefits
Dividends can have tax benefits for both the shareholders and the company giving them out. For the company, by giving part of their profits to shareholders, they won’t be taxed on that money, therefore paying less in taxes. For shareholders, there can also be a tax break.
Four Dividend Investing Tips
Find Companies With Strong Track Records
When it comes to dividend investing, find companies with solid track records, meaning they are well established and have high market values.
Find Sustainable Dividends
Remember that payout ratio mentioned earlier? Make sure you find a company that has a payout ratio in the 30% – 50% range as anything higher could be unsustainable, and anything lower means the company is more focused on growth than paying out dividends.
Annual Increase Streaks
The four dividend stocks noted earlier that they all have a long streak of annual dividend increases. So, yes, you might find stocks with higher yields, but that doesn’t mean anything if that company can’t sustain those yields or raise its dividends year over year.
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