What are dividends?

In a nutshell

Dividends are payments made to qualifying shareholders as a reward for holding particular stocks. Different companies offer varying payouts, which are determined by a company’s board of directors.

• Cash and stocks are the most common types of dividends, and they’re often paid quarterly.
• You can purchase dividend stocks through a brokerage account.
• Dividends could be taxed as ordinary income or capital gains, depending on when you purchase stock shares.

What is a dividend?

A dividend is a payout to shareholders. It’s commonly distributed from a company's net profits, usually once a quarter. Depending on the company or investor preferences, dividends are often paid in cash or as reinvestments in stock.

How dividend stocks work

Companies with dividend stocks pay a percentage of their net profits to shareholders, often quarterly. However, payment intervals can vary depending on the company. Some may pay dividends monthly, bi-annually or annually. Companies can also make special dividend payments on their own preferred timeline if they choose.

A company’s board of directors determines its dividends payout rate. Because these decisions are made quarterly or annually they can change over time. The dividend payout rate, also known as the dividend yield, is the annual dividends paid in dollars divided by a company’s share price, expressed as a percentage. For example, a company that pays out $5 per share in annual dividends with stock shares valued at $300 would have a dividend yield of 1.67%.

Dividend payouts are like a special reward to shareholders for holding a company’s stock. These regular payouts boost investor trust and may increase the likelihood that an investor will retain their shares over time.

Types of dividends

Cash dividends

As their name suggests, cash dividends are paid out in cash to shareholders on a specific timetable determined by the company.

Stock dividends

Companies can also pay stock dividends. These are paid out in the form of fractional or full shares of stock instead of cash.

Scrip dividends

With scrip dividends, companies give shareholders the choice to receive their payouts as cash or new company stock.

Property dividends

With property dividends, companies elect to pay investors in shares of tangible property, like a subsidiary company or another owned asset. This type of dividend payment is rare, though.

Liquidating dividends

Liquidating dividends are also less common than cash or stock dividends. A company might pay liquidating dividends after a partial or full liquidation. These dividends are typically paid out once a company decides to partially or fully cease operations and exit the market.

How to invest in dividend stocks

You can purchase shares of dividend stocks through a brokerage account, which you can open through a major investment firm like Fidelity or Charles Schwab. Online brokerage accounts from companies like Sofi Invest and Robinhood are also worth considering.

After you’ve opened a new brokerage account, you can link up your bank account to fund it. You can then purchase your preferred dividend stocks using the funds in your brokerage account. Before purchasing dividend stocks, it makes sense to compare multiple options and choose the stock that best fits your investment goals.

Important dividend dates

There are two important dates associated with dividend stocks:

The record date

A record date, sometimes called a date of record, is the date the company determines which shareholders will receive the next dividend payouts. To be designated as a shareholder by the record date, you’ll generally need to buy dividend stocks a couple of days beforehand.

The ex-dividend date

An ex-dividend date is generally one day before the record date, and it’s set based on the rules of a particular stock exchange. Typically, if an investor purchases a dividend stock before the ex-dividend date, they’ll receive the next dividend payout. The seller will receive the next dividend payout if an investor buys it on or after the ex-dividend date.

How are dividend stocks taxed?

Dividends can either be ordinary or qualified and sometimes both. If ordinary dividends are considered nonqualified, they’re taxed at your ordinary income tax rate. But if they meet certain qualifying criteria set by the IRS, they are considered capital gains and are taxed as such.

Ordinary dividend payments are classified as qualified if an investor has held their stock “for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date,” according to the IRS.

Capital gains are taxed at 0%, 15% or 30%. Your capital gains tax rate depends on your total income.

The AP Buyline roundup

Dividends are a share of the profits a publicly-traded company pays to stockholders. If you’re a shareholder of a company that pays dividends, you could receive small payouts each quarter as a reward for retaining your shares. Different types of dividend payouts exist, but the most common are cash and stock dividends, which are paid out as cash or additional shares, respectively.

Frequently asked questions (FAQs)

What are dividend aristocrats?

Dividend aristocrats are companies that have consistently paid dividends and increased dividend payouts to investors over the past quarter-century. The S&P 500 Dividend Aristocrats is one index that measures their performance.

What is an example of a dividend stock?

Johnson & Johnson, Verizon and Comcast are three examples of dividend stocks. Each pays out dividends regularly to investors.

How do dividends pay out?

Dividends are typically paid out in cash or in the form of new shares of stock directly to your brokerage account. Companies may also pay other types of dividends, however. For instance, a company might pay a liquidation dividend to shareholders if it decides to close down and exit the market.

How often is a dividend paid?

It depends on the company. Dividends are generally paid quarterly, but they can also be paid monthly, bi-annually or annually. Companies might also pay special dividends whenever they choose.

What is a good dividend yield?

Dividend yields can vary by industry and sector, so there’s not one specific “good” dividend yield. For instance, companies in a high-growth industry or sector might pay dividend yields of 15%, while those in slower-growth industries might pay just 2%.

When investing in a dividend stock, look beyond the dividend yield. Assessing the company’s net income relative to its dividend yield can help you determine if its payouts are sustainable.

Are dividends irrelevant?

Some might argue that dividends are irrelevant to company performance, as these payouts don’t increase the value of company stocks. Dividends are also paid from a company’s profits, so instead of reinvesting that amount in itself to spur growth, payouts are given to investors. For many investors, however, dividends are valuable as a source of extra return on their investment.