Dividends are cash payments issued by a company to its investors on a regular basis, usually quarterly.
The amount of an investor’s dividend payment is proportionate to the amount of stock owned. Many investors look carefully at dividend offerings when considering whether to purchase a stock or not.
Investors may rely on dividend distributions to support their fixed incomes. They may also elect to have their distributions automatically reinvested in the stock, raising their share count over time.
Preferred Stock Dividends vs. Common Stock Dividends
For investors relying on dividend payments to support themselves, the most stable dividend payments are often found in preferred stock issues. Dividends on preferred stock shares are paid before dividends on common stock shares.
Dividends Are Not Guaranteed
Even though many companies place high priority on keeping their dividends competitive, so as to satisfy their current investors and to attract new ones, the issuance of dividends is solely at the discretion of the company. Companies may choose not to issue dividends or to lessen their dividend payments when cash gets too tight.
Some stocks choose not to pay out dividends regardless of whether or not profits are rolling in. Stocks with more of a growth focus are likelier to forgo paying out dividends, opting instead to apply their profits to growth and expansion initiatives.
Dividend yield is the percentage of a stock’s dividend relative to its share price. A stock that trades for $50 per share and pays a dividend of $1 has a dividend yield of 2% (2% of $50 is $1).
When shopping for stocks, one can use dividend yields to compare the dividend offerings of various stocks irrespective of their share price.
For example, Stock A may have a share price of $100 and offer a dividend of $2, whereas Stock B has a share price of $20 and offers a dividend of 50 cents.
Stock B actually pays more of a dividend per dollar invested than Stock A.
The dividend yield percentage for stock B is 2.5% (.50/20). The dividend yield percentage for stock A is 2% (2/100).
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