Investing 101: A Beginner's Guide to Dividend Stocks

May 7th 2016

Definitions

A dividend represents a portion of a company's earnings distributed to shareholders after a certain amount of time. Businesses usually express the amount of a dividend as an amount per share. One share of stock denotes how much of one company an investor owns. If a person owns a single share out of 1 million, that person owns one millionth of the company. A dividend stock pays investors a certain amount per quarter, per month, or per year, often based on a firm's profits over that period of time. Before an investor purchases stock in a particular business, the board of directors typically reveals how often the company distributes dividends.

How Dividends Pay Out

When the board of directors announces a dividend, the company states the payout per share. For example, if the board of directors votes to pay investors 5 cents per share in a given quarter, an investor with 1,000 shares makes $50. The more shares an investor owns, the more cumulative money that investor makes when a company distributes dividends. The company sends checks to investors or deposits the money into their brokerage accounts. Some companies pay the same amount every quarter while others base their payout on a percentage of the company's earnings.

The board of directors may opt to issue additional stock as dividends instead of making a monetary payment. This is called a stock split. Companies normally pay dividends quarterly, semi-annually or yearly, but businesses may also issue one-time dividends when something special happens such as a huge contract signing or great holiday sales. In the United States, firms do not have to issue dividends on a set schedule, but many opt to anyway. Firms also don't have to pay a dividend at all, but firms who don't pay a dividend have more trouble attracting investors.

What the Board of Directors Does

The board of directors declares it shall issue a dividend on the declaration date. At this time, the board states the date of record and payment date. The amount of an investor's dividend payout is based on how many shares the investor owns on the date of record. The following business day is the ex-dividend date. An investor must purchase stock in a business before the ex-dividend date in order to receive a share of the profits. The company's stock will usually go down on the ex-dividend date because new investors will not receive the dividend. The payment date is just what it sounds like and denotes when exactly the company disburses money to shareholders.

Conclusion

Dividend stocks represent one of the main ways investors make money in the stock market. Companies, at the behest of their boards of directors, pay shareholders cash dividends based on how well the business is performing and how much of its profits a company needs to invest back into its operations. Publicly traded businesses report dividends in mandatory reports to the U.S. Securities and Exchange Commission. Find out what dividend stocks mean in terms of making money on the stock market with this easy-to-follow guide.

Sources

Most people think of making money in the stock market based on a stock's increase in value, but dividend payments are another major way investors earn money. Consult with your financial adviser or accountant to see if dividend stocks seem like a good way to invest your money.

Discover how dividend stocks pay investors money over time with this handy guide. "Dividend.com" What are dividend stocks?

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