How Stocks Pay Dividends

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How Stocks Pay Dividends

Dividends or sometimes called divvies are remittances from the company as a means to share revenue with its shareholders. The shareholders or the stockholders receive dividends at a given time. This is typically how an investor brings in profits from stock investments. However, keep in mind that not all stocks pay divvies. This topic will be discussed at length later.

In the United States of America, most firms typically pay dividends every three months. Some companies, however, pay dividends every month or every six months. It is necessary for the board of directors of the company to approve each and every dividend. The firm will then declare when the dividends will be given as well as the amount of the dividends and the ex-dividend date.

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Table of Contents

What is an ex-dividend date?

This is very crucial to all investors. Stock investors must own the stock by the “ex-dividend date” in order to be awarded the dividend. Should the investors buy the stock following the ex-dividend date, then they will not be entitled to collect the dividend. Should the investors put the stock on sale following the ex-dividend date, they will still be eligible to get the dividend, because technically they owned the stocks as of the dividend date.

How does it work?

The stock dividends are given per stock share. Let’s say you own 60 shares in a firm and that firm pays you $2 USD in cash dividends every year. That means you will receive $120 USD annually. There are various types of dividends a company picks out to give to its stockholders. Typically, dividends are given out on a company’s common stock.

In lieu of cash payment, companies use stock dividends to pay investors with more stock shares. This type of dividends is called stock dividends.

The most typical kind of dividend is cash dividends. Typically, the firms directly give cash straight into the stockholder’s brokerage account. Now, dividends that are paid on all shares of the common stock of the firm are called special dividends.

This does not regularly happen as regular dividends do. A firm usually gives out special dividends for revenues that have been piled up over several years because it does not necessitate a prompt need.

What about preferred dividends?

These are payments given to preferred stock owners. Preferred stock is a kind of stock that works more like a bond rather than a typical stock. This type of dividend is typically given every three months. Dividends on this type of stock have a permanent price as opposed to the dividends of the common stock, which fluctuates.

Another kind of dividend is the DRIPs, short for dividend reinvestment program. Investors are capable of reinvesting any dividends gained back to the stocks of the company. Most often they do this with a discount.

As mentioned earlier, not all stocks pay dividends. So it’s advisable to get dividend stocks.

Why?

Because investors, in general, would rather put money in firms that give dividends which continue to grow big through the years. Thus, providing a steady and expanding flow of income.

Dividend stocks are in all likelihood, settled by strong traditional companies. Most of the time these companies no longer have to put as much money back into the business.

Fast-growing companies hardly give dividends because they usually reinvest their profits to let the business grow more. The most trusted big wigs in the American industry show a great record of dividends that are getting bigger for long periods of time. Without any commissions.

There is no guarantee for dividends on common stock. Nevertheless, as a company builds and increases its dividends, its investors are presuming that it will be sustained regardless of the circumstances.

Because dividends are deemed a symbol of the company’s financial success. Obviously, more often investors depreciate the value of the dividend should they think the dividend will be lowered — thereby lowering the share price.

Most financial advisors would say that one of the fastest ways to measure the safety of the dividend is to look at its payout ratio. This is the ratio or the part of the net income that is usually allocated towards dividend payments. If a firm gives out 100% or more of its revenue, that could be a distress call.

During difficult circumstances, profits might decrease and not enough to pay dividends. In general, the stock investors prefer payout ratios that are below 80%. Just like a stock’s outcome, the payout ratio of a company will be found on listings from other online brokers or financial brokers. These financial brokers typically report the dividend yield of the company.

The dividend yield is actually the measure of the yearly dividend split by the price of a stock on a specific date. Do note that the price of the stock and the yield are opposites — like a seesaw, when one side goes up, the other side naturally goes down.

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