What are dividend stocks?
Dividend stocks reward their shareholders with regular payments out of company earnings. These payouts may come quarterly, semi-annually or annually. The board of directors is responsible for setting the company’s dividend policy and for determining the size of the dividend payout based on the firm’s long-term revenue outlook.
The more shares an investor holds in a particular dividend stock, the higher the payment you receive will be. For example, if you own 100 shares of a stock paying an annual cash dividend of $3, you would receive $300 in annual dividends from that company. If that company paid a quarterly dividend, you would receive $75 in dividends every three months for a total of $300 over the course of the year.
Cash dividend payments are typically sent to shareholders through the investor’s brokerage account. However, companies may also pay out dividends by issuing stock (referred to as a stock dividend), or by offering discounts on stock purchases through dividend reinvestment programs (DRIPs).
Other dividend types include special dividends, which are one-time payments to holders of common stock that are paid out from a company’s accumulated profits; there are also preferred dividends, which are paid to holders of preferred stock on a quarterly basis at a fixed rate.
When declaring a dividend, an ex-dividend date is set based on stock exchange rules. This date determines whether or not shareholders in the company are eligible for the dividend payout.
Those shareholders that purchased stock before the ex-dividend date are entitled to the dividend. Conversely, if you purchased stock on or after the ex-dividend date, the seller will receive the payout and you will have to wait until the next declared dividend to reap the rewards of holding a dividend stock.
To determine an ex-dividend date, check a company’s dividend announcement, where it should note that the dividend will be paid to stockholders of record up to a certain date.
Pros and cons of investing in dividend stocks
There are several advantages to dividend stocks, especially for those who prefer a long-term approach to investing, including acting as a source of income and providing stability.
Companies that pay stock dividends and DRIPs offer investors the opportunity to grow their holdings. Cash dividend stocks, on the other hand, provide an additional source of income that can be used for things such as your mortgage, vacations, healthcare or a child’s university tuition.
Another attractive feature of dividend stocks is the security they offer. Companies that are able to pay dividends are often well-managed firms with the ability to generate consistent revenues, even in the face of a volatile market.
As for taxation on dividend stocks, for investors in the US and Canada, the tax rate on qualified or eligible dividends will typically be lower than other forms of investment income. The dividend tax rate will depend on many factors such as your…