What Is A Dividend?

What Is A Dividend?

by Apr 4, 2019Investments

For investors looking for good returns without taking too much risk, or retirees looking for a reliable source of post-retirement income, stocks that pay dividends are a great investment.

Dividends are payments made by a company to the owners of the company’s stock. Basically, they’re a way for publicly held businesses to distribute revenue back to investors. Not all stocks pay dividends though, so investors that want dividends need to specifically seek out stocks that do.

How Dividends Work

Here in the United States, businesses usually pay dividends quarterly, though some pay monthly or semi-annually. Dividends are paid per share of stock – which means if you own 30 shares of a company, and that company pays $3 in annual dividends, you will receive $90 per year.

Before a dividend is paid, a company’s board of directors must approve it. This means they must:

  1. Approve to pay a dividend
  2. Decide how much the dividend will be
  3. Decide when the dividend will be paid
  4. Determine an “ex-dividend” date

An ex-dividend date is the date by which a company’s stock must be owned in order for the shareholder to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend.

Understanding Dividend Yield

Many financial websites and TV shows often discuss and compare various dividends using the phrase “dividend yield”.

Dividend yield is simply the annual dividend amount divided by the stock price. So, for example, a $10 stock paying an annual yield of $0.40 (or $0.10 per quarter) has a dividend yield of 4% (0.40/10=0.04, or 4%).

Knowing a company’s dividend yield is often easier when trying to compare companies with vastly different prices and dividend amounts.

Using the same example as before, a $10 stock paying $0.10 quarterly ($0.40 per share annually) has the same yield as a $100 stock paying $1 quarterly ($4 annually). In both cases the yield is 4%.

What Types Of Stocks Pay Dividends?

Dividends are more likely to be paid by older, well-established companies that no longer need to reinvest as much money back into their business in order to grow. High-growth, tech, and biotech are examples of industries that rarely pay dividends, because they need to reinvest profits into expanding that growth.

From an investment standpoint, once a company establishes or raises a dividend, investors expect it to be maintained, even in tough times. The most reliable American companies have a record of growing dividends – with no cuts – for decades. Investors will often devalue a stock if they think the dividend will be reduced, which lowers the share price and devalues the company.

How To Invest In Dividend-Paying Stocks

There are several ways to invest in stocks that pay dividends. Some investors prefer to pick stocks individually based on certain criteria, while other may choose dividend-focused mutual funds and exchange-traded funds.

If you are interested in investing in stocks that pay dividends, consider speaking with an experienced financial planner who can help evaluate your current financial situation and make a recommendation. A financial planner can also help you create a portfolio based around what you financial goals are, whether it’s saving for a new home, retirement, or some other goal.

To learn more about investing in a dividend-based stock portfolio, contact us today for a free financial consultation.

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