Dividends: Why Companies Pay Them and What They Mean for You
Dividends are a share of a company’s profits that are paid out to shareholders on a regular basis. For many companies, these payments are made quarterly. Dividends can be a great way to earn extra income, but it’s important to understand how they work before you invest in dividend-paying stocks. Here’s what you need to know.
What Dividends Are and How They Work
Dividends are a portion of a company’s earnings that are distributed to shareholders. These payments are typically made on a quarterly basis, but some companies choose to pay them monthly or annually. When a company declares a dividend, the board of directors sets an “Record Date.” This is the date that determines which shareholders will receive the dividend payment.
To qualify for the dividend, you must have been a shareholder on or before the Record Date. For example, suppose Company XYZ declares a dividend on March 1 with a Record Date of March 15. This means that anyone who owned shares of Company XYZ on March 15 would be eligible to receive the dividend payment when it is distributed on April 1.
Why Do Companies Pay Dividends?
There are two primary reasons why companies pay dividends:
- To reward shareholders – Shareholders are partial owners of the company and thus have a vested interest in its success. By paying dividends, companies can show their appreciation for shareholders’ investment and encourage them to continue holding the stock in the future.
- To raise capital – Some companies use dividends as a way to raise capital for expansion or other business needs. Instead of selling new shares or taking out loans, they draw from their available cash to pay shareholders a dividend. This has the added benefit of not diluting existing shareholders’ ownership stake in the company.
What Do Dividends Mean for You?
If you’re thinking about investing in stocks that pay dividends, it’s important to keep in mind that these payments are not guaranteed. Companies can choose to increase, decrease, or eliminate their dividend payments at any time without prior notice. In addition, dividends are not exempt from taxes. Depending on your tax bracket, you could end up paying 15-20% of your dividends in taxes.
Dividends can be described as distributions of property that a corporation may pay to you if your stock is in that corporation. Most dividends are paid in cash by corporations. Distributions may also be made through an interest in a partnership or estate, subchapter S corporations, trusts, or associations that are taxable as corporations. You will generally report your share of dividends received by the entity on Schedule K-1. You must report any dividends exceeding $1,500 in taxable ordinary dividends on Schedule K-1 (Form 1040).
Dividends can be a great way to boost your income, but it’s important to do your research before investing in dividend-paying stocks. Make sure you understand how dividends work and remember that these payments are not guaranteed. With that said, dividends can be a worthwhile addition to any portfolio if you choose stocks wisely and monitor them carefully.
Xander is a writer for whatisdividend.com. He has been writing about personal finance and investing for over 10 years. His work has been featured in numerous publications, including The Wall Street Journal, Forbes, and Money Magazine. He is a Certified Financial Planner and holds a degree in financial planning from Boston University. In his spare time, he enjoys spending time with his wife and two young children.