Dividends are payments from a company to all its stock owners. Not all companies pay a dividend and the amount of each dividend is quite variable between companies. Some companies choose to keep all their profits to reinvest in the company and some companies choose to pay out some of those earnings as dividends. Whether a company pays a dividend or not is not an indicator of how good the company is as an investment.
A dividend is usually a dollar amount per share per payment period. If a company pays $0.25 per share per quarter then an owner would receive $1.00 (4 x $0.25) per year for each share that they own. If they owned 200 shares, then the dividend amount would be $50.00 per quarter (200 x $0.25).
Payment frequency
Typically, most companies pay dividends on a quarterly basis but there are no set rules regarding the timing. Sometimes a company will pay out a “special” distribution which is essentially an unscheduled dividend.
Taxes on dividends
Dividends are taxed more favorably than interest payments which are considered as regular income so there is less of a tax burden on dividend paying stocks compared to bonds or other fixed income securities which pay interest.
Do mutual funds pay dividends?
Stocks that are owned in a mutual fund will still pay dividends – the managers of the investment fund will add up any dividends received and will pay them out as a dividend to the unit holders (investors).
Reinvested dividends or cash
If you own a stock or mutual fund that pays a dividend then you can elect to receive the dividend as cash (ie they mail you a check or direct deposit) or it can be reinvested. Reinvesting a dividend means that the money from the dividend is used to buy more of the investment you own.
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Great article. You can also generate some monthly income by selling calls against stocks you own. That is called a covered call.
Good concise post! You covered most of the basics and a very good introduction to dividends!
Great introduction. I would add that sometimes, only certain kinds of shares of a company receive dividends. This might be the case where a company has multiple types of preferred shares.
Nicolas
This is a pretty good post on dividends. Future posts could also add that dividends provide 35-40% of average annual total returns over the past 100 years.
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