Even if you're new to investing you've probably heard about dividends. These are payments publicly traded companies may make to shareholders and can take the form of cash or additional shares, known as stock dividends.
There are several reasons investors look to dividend stocks: Most pay out quarterly, which can provide relatively reliable income. Companies that pay dividends are typically seen as more stable and financially sound and, historically, dividend stocks have provided a buffer during market downturns.
Below, CNBC Select explains how dividends are paid out, how to judge their value and more.
What we'll cover
- What is a dividend?
- How are dividends paid?
- How to invest in dividend stocks
- Are dividends taxed?
- Bottom line
A dividend is a portion of a company's earnings that is paid to a shareholder. The most common type of dividend is a cash payout, but some companies will issue stock dividends.
Dividends are typically issued quarterly but can also be disbursed monthly or annually. Distributions are announced in advance and determined by the company's board of directors.
Companies pay dividends for a variety of reasons, most often to show their financial stability and to keep or attract investors.
Not all stocks pay dividends — in fact, most do not.Some major companies, including Amazon and Alphabet, have never issued dividends.
Companies that do pay dividends tend to be larger and more established, with steady growth rather than sudden spikes. S&P 500 companies that have a long history of paying increased dividends are called Dividend Aristocrats.
Dividends are typically paid according to how many shares you have. If you own 100 shares of a company that is trading at $1 a share and paying a dividend of 25%, you would be paid $25.
Cash dividends are paid out either as a check sent to the investor or as a credit to a brokerage account, which can then be reinvested.
Stock dividends are paid in fractional shares. If a company issues a stock dividend of 5%, shareholders will receive 0.05 shares in dividends for every share they already own.
There are several important days to keep in mind when it comes to dividends.
- The declaration date is when a company announces that a dividend will be paid.
- The ex-dividend date (or "ex-date") is the deadline to purchase a stock and still be eligible to receive the dividend. It is set according to stock exchange regulations.
- The record date is the date by which investors must be on the company's books in order to receive a dividend. Officially set by the board of directors, it's usually one day after the ex-dividend date. Any trades made on this date are not eligible for dividends until the next distribution.
- The payment date is when dividends are paid to shareholders.
- The settlement date is the day a trade is finalized and a shareholder officially owns the stock if they purchased shares or they receive payment if they sold shares. It's typically two days after a buy order is made.
There are different ways to measure dividends and their value to investors.
- The dividend rate represents how much of a stock's share price shareholders receive in dividends. If a stock is trading at $100 a share and pays a dividend of $5 each quarter (or $20 a year), the dividend rate is 20%.
- A dividend payout ratio, meanwhile, indicates what percentage of a company's earnings is being paid out in dividends. If a company has earnings of $100,000 and pays total dividends of $20,000, it would have a dividend payout rate of 20%.
- A dividend yield is one of the ways investors determine if a stock is profitable. To find it, divide the stock's annual dividend by its current share price.So, if a stock is trading at $100 and its annual dividend per share is $5, the dividend yield is 5%.
Investment options for dividend stocks are as varied as they are for any other stock — you can choose shares of an individual company, mutual funds or ETFs.
The easiest way to buy dividend stocks is by opening a brokerage account. Ally Invest®'s self-directed cash account has no minimum balance requirement, making it an attractive option for those dipping their toes into the market for the first time.
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While stock dividends are typically not taxed until the shares are sold, cash dividends are considered taxable income by the IRS. How they're taxed, however, depends on whether they're qualified or nonqualified: Qualified dividends, which have been issued by a U.S.-traded company to shareholders who have owned the stock for more than 60 days, are subject to capital gains tax rate.
All other dividends are considered nonqualified and are subject to standard income tax rates.
If you receive more than $10 in dividends, your brokerage will send you a 1099-DIV form with relevant information for completing your tax returns.
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What is a dividend?
A dividend is a portion of a company's profits that is paid to its shareholders, usually quarterly.
What types of companies offer dividends?
Dividends are more commonly offered by well-established companies that exhibit consistent but tempered growth over time.
How are dividends taxed?
Ordinary dividends are taxed at the standard income tax rate while qualified dividends are taxed at the capital gains rate.
How can I calculate my dividend?
Dividends are typically paid out by the share. If you own 100 shares of a company that is paying a dividend of $.25 per share, you will earn $25.
What is a dividend yield?
A dividend yield is a percentage that compares a company's stock price to the dividend it pays. It is one of several metrics investors will use to determine if a stock is profitable.
Stock dividends allow companies to share a portion of their profits with its investors. Dividends from stocks can be an additional source of passive income allowing individuals to further grow their finances.
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
I'm a seasoned financial expert with extensive knowledge in investing and a thorough understanding of the concepts discussed in the article. Over the years, I've actively participated in financial markets, staying abreast of market trends, investment strategies, and the intricacies of various financial instruments. My experience includes advising individuals on building and managing investment portfolios, with a particular focus on dividend stocks.
In the article, the author covers essential concepts related to dividends and investing in dividend stocks. Let's break down the key points:
What is a Dividend?
- A dividend is a portion of a company's earnings paid to shareholders. It's a way for companies to share profits with investors.
How are Dividends Paid?
- Dividends are typically paid in the form of cash or additional shares. Cash dividends can be received as a check or credited to a brokerage account for reinvestment. Stock dividends are paid in fractional shares.
Important Dates for Dividends:
- Declaration Date: When the company announces a dividend.
- Ex-Dividend Date: Deadline to purchase a stock and be eligible for the dividend.
- Record Date: Date investors must be on the company's books to receive the dividend.
- Payment Date: When dividends are paid to shareholders.
- Settlement Date: When a trade is finalized, and ownership is transferred.
- Dividend Rate: Represents the percentage of a stock's share price paid in dividends.
- Dividend Payout Ratio: Indicates the percentage of a company's earnings paid out as dividends.
- Dividend Yield: A measure of a stock's profitability, calculated by dividing the annual dividend by the current share price.
How to Invest in Dividend Stocks:
- Investors can choose individual company stocks, mutual funds, or ETFs.
- Opening a brokerage account is a common way to invest in dividend stocks.
- Ally Invest and Charles Schwab are mentioned as brokerage options, each with its features, fees, and investment vehicles.
Taxation of Dividends:
- Stock dividends are usually not taxed until shares are sold.
- Cash dividends are considered taxable income, with qualified dividends subject to capital gains tax and nonqualified dividends taxed at standard income tax rates.
- Stock dividends allow companies to share profits with investors, providing an additional source of passive income.
This article aims to guide both new and experienced investors on the intricacies of dividends, their value, and how to navigate the world of dividend stocks. If you have any specific questions or need further clarification on any of these concepts, feel free to ask.