What Are Dividends - Beginner’s Guide On How They Work?

What Are Dividends & How Do They Work? A Beginner’s Guide — The Ultimate Guide to Dividend Stocks. We answer all your questions, from what a dividend is to how to find the best dividend stocks.

I hear quite often from people who are starting to invest. Or, you might ask, “what are dividends?” when learning about the benefits of investing. This beginner’s guide will help you get started in the world of dividend investing.

Either way, you will start reading about the term “dividends” as you start investing, saving for retirement, improving your financial future, and so on.

But, What Are Dividends?

We answer all your questions, from what a dividend is to how to find the best dividend stocks.

Dividends are simply a payment in cash or stock that public companies distribute to their shareholders.

That’s the simplest way to answer the question, but there is still a lot to understand about what are dividends.

What are Dividends? A Beginner’s Guide to Understanding Dividend

What Does Dividend Mean?

A dividend is a distribution of a company’s profits to its eligible shareholders. Your dividends may be cash, stock, or even warrants to buy stock.

The amount of a dividend is determined by a company’s board of directors, and they are given as a way to reward those who have stock in their company.

The Difference Between Preferred and Special Dividends

While no dividends are guaranteed, some take precedence over others.

Shareholders who hold preferred stock have a higher claim on a company’s assets than common shareholders but a lower claim than bondholders.

When Are Dividends Paid?

Dividends are paid on a monthly, quarterly, or yearly basis, but it’s most common for them to be paid quarterly. It all depends on the company.

To understand what are dividends and when they are paid, here are three dates to understand:

Declaration Date: The date when the company’s board or management team announces a dividend will be paid. The company still has to vote on whether or not to pay them.
Ex-dividend Date: You must own a dividend-paying stock by this date to receive the dividend. So, if the ex-dividend date is March 1, then you must own stock in that company by at least the day before to be eligible for dividends.
Date of Record: This date always follows the ex-dividend date. It is the day upon which the stockholders must be on the company’s record books in order to be eligible to receive that period’s dividend. It’s basically the ex-dividend date on the company’s side, whereas the previous date concerns the exchange itself.
Payment Date: The day dividends are paid out on dividend-paying stocks.

Different Types of Dividend

Companies can decide to pay dividends in several different forms, from cash to additional stock shares

a). Stock Dividend

A dividend paid in stock shares rather than cash is a pro-rata distribution of additional shares of a company’s stock to owners of the common stock.

A company may opt for stock dividends for a number of reasons. Including inadequate cash on hand or a desire to lower the price of the stock on a per-share basis in order to prompt more trading and increase liquidity. (i.e., how quickly an investor can turn their holdings into cash).

b). Property Dividend

In the case of a property dividend, a company distributes property to shareholders instead of cash or stock. Property dividends are recorded at market value on the declaration date.

They can take the form of railroad cars, cocoa beans, pencils, gold, silver, salad dressing, or any other item with tangible value.

c). Special One-Time Dividend

In addition to regular payouts, there are times when a company may pay a special one-time dividend.

These are rare and can occur for a variety of reasons, such as a major litigation win, the sale of a business, or liquidation of an investment. They can take the form of cash, stock, or property dividends.

d). Cash Dividend

Regular cash dividends are those paid out of a company’s profits to the owners of the business (i.e., the shareholders).

A company that has Preferred Stock issued must make the dividend payment on those shares before a single penny can be paid out to the common stockholders.

For reasons that will be discussed later, most companies are hesitant to increase or decrease the dividend on their common stock

Do All Stockholders Earn Dividends?

No, not all stockholders are eligible to receive them equally, even if the company has dividend-paying stocks.

There are factors such as preferred and common stock, and there are even different classes of stock.

For instance, if a dividend-paying stock has both common and preferred stock, those owning preferred stock are more likely to be paid dividends.

How Do Dividends Work?

If you own shares of a dividend-paying stock, then a dividend is paid per share of that stock.

So, if you have 10 shares in Company XYZ, and they pay $5 in cash dividends each year, then you will get $50 in dividends that year.

While dividends can be paid on a monthly, quarterly, or yearly basis, they are most commonly paid out quarterly – so 4 times a year.

In the example above, the $5 in cash dividends the company pays each year will most likely be distributed as $1.25 per quarter for each share of stock.

Why Do Some Companies Not Pay Dividends?

Newer companies or companies that are still growing are less likely to pay dividends because they’re reinvesting their profits back into the company in order to grow.

Surprisingly, there are still some large companies that don’t pay dividends. The most notable ones are Amazon, Meta (which was Facebook), Tesla, and Alphabet (which owns Google).

What Are Dividend Stocks?

A dividend stock is any stock in a company that pays a dividend.

Both private and public companies pay dividends, but not all companies offer them. Additionally, there are no laws that require companies to pay dividends.

What Are The Best Dividend Stocks?

If you’re wondering what are dividend stocks, there’s a good chance you want to know which are the best. The best dividend stocks are ones that pay a high yield and pay dividends consistently.

Many experts believe that the S&P 500 Dividend Aristocrats index contains companies known for the best dividend stocks.

The Dividend Aristocrats index includes companies like:

3M Co.
Phillips 66
Hasbro Inc.
Universal Corp
Omnicom Group Inc.
National Bankshares Inc.

What Stocks Pay Dividends? Which Companies Pay Dividends?

Not all companies have Dividend-paying Stocks.

Larger companies that have been around for a long time are usually the ones that pay dividends. But, even though a company has paid a dividend in the past, it does not mean that it will always pay dividends.

For example, if a company isn’t profitable, the board may vote not to pay dividends.

However, if a company is known for paying dividends and they’re decreased or eliminated, then shareholders and the public may assume that the company is not doing as well. This can impact the stock price.

Here are some Dividend-Paying Stocks:

Ford
Apple
Target
Lowe’s
Coca-Cola
Walgreens
McDonald’s
3M Company
Johnson & Johnson
Procter & Gamble Co.

What Is Dividend Income?

Dividend income is any distribution of a company’s property to its shareholders. This can be in the form of cash, stock, or anything else.

When you read about someone trying to live on dividend income, they are talking about living off the income they earn from dividend-paying stocks.

Most people don’t live off of dividend income, but it can be a nice source of passive income.

Is a Dividend Good or Bad?

Investing in stocks that pay dividends is generally thought to be a wise decision. They are often thought to be safer than stocks that don’t pay dividends, but it’s not as simple as that.

See, when you earn dividends, that money isn’t automatically being reinvested – it becomes un-invested cash unless you are enrolled in a dividend reinvestment program (more on this shortly).

Also, dividends affect a company’s share price.

This is because a company pays dividends from its profits. Typically, dividend payments will increase the share price on the dividend announcement date, as well as a decrease on the ex-dividend date.

Can I Reinvest My Dividends?

Yes, there are different ways to invest your dividends.

One of the reasons you may be asking, “What are dividends?” is because you’ve heard of a dividend reinvestment program. This is also known as DRIP.

Many online brokerages, Robo-advisors, and Micro-Investing Apps offer a DRIP program.

The way a dividend reinvestment program works is that dividends are automatically reinvested in the company. This is typically done by purchasing micro or fractional shares of that company’s stock.

For example, if you have money invested in Apple shares, when you earn your Apple dividend, the DRIP program automatically reinvests your dividends in more Apple shares.

Your dividends are used to automatically purchase more shares.

Depending on your long-term goals, this is a good way to make your money work for you.

How Dividend Reinvestment Plans Work

When an investor enrolls in a dividend reinvestment plan, they will no longer receive cash dividends in the mail or directly deposited into their brokerage account. Instead, those dividends will be used to purchase additional shares of stock in the company that paid the dividend. There are several advantages to investing in a DRIP:

Enrolling in a DRIP is easy. The paperwork (both online and in print) can normally be filled out in under one minute.
Dividends are automatically reinvested. Once the investor has enrolled in a DRIP, the process becomes entirely automated and requires no more attention or monitoring.
Many dividend reinvestment plans are part of a Direct Stock Purchase Plan. If you hold at least one share directly, you can have your checking or savings account automatically debited on a regular basis to purchase additional shares of stock.
Purchases through dividend reinvestment programs are normally subject to little or no commission.
Dividend reinvestment plans allow you to purchase fractional shares instead of only whole shares. Over the decades, that can result in significantly more wealth in the investor’s hands.
You can enroll only a limited number of shares in the dividend reinvestment plan and continue to receive cash dividends on the remaining shares.

How Do I Make $500 a Month In Dividend?

If you want to make $500 a month in dividends, there’s not an exact amount you need to invest in dividend stocks. This is because different companies pay different dividend amounts.

However, to make $500 a month in dividends, you most likely will need to invest over $200,000 in dividend-paying stocks.

This is because the current average on dividend-paying stocks is usually a little less than 2%, and some companies may pay more or less than this amount.

Can I Live Off Of Dividends?

Yes, many retirees live off of their dividends – either fully or partially.

This is one of the best passive income ideas to work towards. It does take money to start, but this is something you can work on even if you don’t have much money to start.

By investing in dividend-paying stocks, you may be able to earn a decent amount of passive income with very little work needed to be done.

What Is Dividend Growth Investing?

“The core idea of dividend growth investing is to invest in businesses via the stock market that are likely to pay growing dividends over time.

Dividend growth investing has a hidden benefit. It focuses you on the business, and not on the stock price.

This means less (and hopefully no) panic selling during recessions. In fact, many dividend investors take advantage of market declines by purchasing into great dividend growth stocks while they are trading at a discount.” – Ben Reynolds

What Is A Good Resource On Dividend Investing?

A popular resource on the topic of dividend investing is Sure Dividend.

This resource provides their top 10 selections for dividend stocks with 25+ years of rising dividends each month

How Can I Track My Investment Portfolio?

I recommend Personal Capital, which is a free tool to track your investments. Now, Personal Capital does not have a dedicated dividend tracker, but it is a great tool to track your overall investments.

You can see your investment portfolio all in one place so that you can easily track your performance, see your investment allocations, and easily analyze your investments.

The Personal Capital Retirement Planner will also tell you if you have saved enough for retirement.

How Can I Invest In Dividend-paying Stocks?

The first thing you need to do is find an investment platform. Then, set a budget and decide which dividend-paying stocks you want to invest in.

How Often Are Dividends Paid?

Most dividend-issuing companies pay dividends quarterly, but that’s just the most common payment schedule, not a rule or requirement.

Except for real estate investment trusts (REITs), companies don’t usually have to issue dividends.

Most companies can decide whether and when they want to issue dividends, and just because they have paid dividends in the past, that doesn’t necessarily mean they’ll do so again in the future.

REITs are the exception, because they are legally required to pay out the bulk of their taxable income in the form of dividends at least once per year.

Why Companies Pay Dividends

Because dividends are typically a sign of financial health, a company may offer them to attract investors and drive the share price up.

A company that commits to paying a dividend is often a higher-quality and more stable company, says Matt Quinlan, who also manages FRDPX.

Generally, companies pay dividends when money is left over after covering operating expenses and business reinvestment.

That’s why mature companies, which require less capital reinvestment, are more likely to pay a dividend.

“As a result, they’ll start to grow their annual dividend to share their profits with their shareholder base,” McMahon says.

What Are Dividends? Summary

A dividend is a way for a company to reward its shareholders.

Not all companies pay dividends, but many do, such as many big companies such as:

Target,
Apple,
Ford, and more.

Dividends do impact a company’s share price, usually by the amount of the dividend.

This is simply another way to earn an annual income passively, and a way to live off of your investments.