What are Dividends?

by Redeeming Riches on May 21, 2012

Are you completely confused as to what all of these stock market and financial services terms are?  Could you explain yourself if someone asked you to answer the question what are dividends?  Most individuals will go on the wrong path and not use the various resources available to them on the internet like this one to learn more about the lucrative and vital task of investing to preserve future income. Though there are many places to start, such as IRAs, savings accounts, bonds, and stocks, one of the most important terms you must know to succeed is “dividends”.

What are Dividends – The Basics

what is a dividend

What is a Dividend

Dividend investing, which often involves buying stocks in companies that payout dividends, is becoming a standard in a post bail-out, low interest rate world. The most beneficial way to preserve the value of your hard earned dollars instead of watching them waste away due to inflation in a bank account, is to invest them in either precious metals, or dividend paying stocks. Dividends are quite simply a distribution of profits from a corporation to its various shareholders. For example, Company A will earn $10 million this year, and distribute $2 million in $2 increments per stock held. This would mean that if you were a shareholder in this company, and held twenty shares, you would be paid out forty dollars come payment time. Companies pay out certain amounts from their profits to shareholders, most often on an annual or quarterly basis.

Benefits of Dividend Paying Stocks

Dividend investing provides a host of benefits that may far outweigh some of the other viable options out there in the volatile marketplace. Most notably, dividends provide a constant share of the profits to the shareholders that make up a company. It is much more rewarding, both financially and in terms of morale, to understand that purchasing a stock can be more of an investment with a real return rather than a gamble that feels like a Las Vegas Roulette game. Regular stocks consist of the “buy low, sell high” mentality that resembles the uncertainty of gambling. Dividends can ameliorate this problem with its aforementioned constant return rate.

The Drawbacks of Dividends

Though dividend investing can be useful for solidifying your portfolio, it does come with some major drawbacks that seem to undermine the idea of safe, low-risk investing that keeps you in the game without the possibility of losing your shirt. The greatest drawback is the risk of dividend taxes doing up to around fifty percent in the near future as former tax breaks expire. It is a burden to know that the Federal Government can be taking away almost half of this constant stream of income, making it less worth the while in general. Also, the whole idea of constant may, in fact, be an ephemeral thought. Companies can, at any time, choose not to pay dividends at all. It is the status quo in the market that once a company starts to pay, it usually doesn’t end the payments unless it suffers from a major fall. Even though some can rest easy knowing this, it is still the decision of the Board of Directors, and the money can stop flowing at any time for any reason. This makes the idea of purchasing a stock only for its dividends much harder to swallow. Lastly, the idea that the money taken out for dividends is taken away from future investment is one that has great bearing on a company. Though dividends can be great by providing short term happiness through consistent payment, always take into account that all that money paid out wasn’t used to drive up the actual stock price of the company through investment.

Technical Dividend Terms

Declaration Date – When the payment will be paid according to the Board of Directors.

In-Dividend Date – Last day that the stock includes the dividend, if it is sold before this date, the original owner cannot claim a dividend.

Ex-Dividend Date – The date on and after which any new owner of the stock will not receive a dividend during the next Declaration Date. However, the new owner is entitled to the dividend on any Declaration thereafter.

Record Date – The date on which the company temporarily closes its book and records any new shareholders.

Payment Date – The date on which checks or credit for the dividend is sent out to shareholders.

Investing in dividends can be one of the best moves you can make with the help of a stock broker. It provides a steady stream of income, represents investment into an established company, and makes you feel like you are actually a part of a grand organization and not just an individual that holds paper. With that, may you be blessed with continued success in all of you future investing endeavors and may you always be informed to the best possible extent. To success. To security. To prosperity.

Good Luck!

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