Investment Read Time: 3 min

A Primer on Dividends

When looking for income-generating investments, some investors turn to dividend-yielding stocks.

When a company makes a profit, that money can be put to two uses:

  1. It can be reinvested in the business.
  2. It can be paid out to the company’s shareholders in the form of a dividend, a taxable disbursement typically made quarterly or monthly.

Dividend Ratios

Investors track dividend-yielding stocks by examining a pair of ratios.1

Dividend per share measures how much cash an investor is scheduled to receive for each share of dividend-yielding stock. It is calculated by adding up the total dividends paid out over a year (not including special dividends) and dividing by the number of shares of stock that are outstanding.

Dividend yield measures how much cash an investor is scheduled to receive for each dollar invested in a dividend-yielding stock. It is calculated by dividing the dividends per share by the share price.

Other Dividend Considerations

Investing in dividend-paying stocks can create a stream of taxable income. But the fact that a company is paying dividends is only one factor to consider when choosing a stock investment.

Dividends can be stopped, increased, or decreased at any time. This is unlike interest from a corporate bond, which is normally a set amount determined and approved by a company’s board of directors. If a company is experiencing financial difficulties, its board may reduce or eliminate its dividend for a period of time. If a company is outperforming expectations, it may boost its dividend or pay shareholders a special one-time payout.

When considering a dividend-yielding stock, focus first on the company’s cash position. Companies with a strong cash position may be able to pay their scheduled dividend without interruption. Many mature, profitable companies are in a position to offer regular dividends to shareholders as a way to attract investors to the stock.

Qualified dividends are taxed at a maximum rate of 20%. Ordinary dividends are taxed at the same rate as federal income taxes, or between 10% and 37%. State income taxes also may apply.2

Be cautious when considering investments that pay a high dividend. While past history cannot predict future performance, companies with established histories of consistent dividend payment may be more likely to continue that performance in the future.

In a period of low interest rates, investors who want income may want to consider all their options. Dividend-yielding stocks can generate taxable income, but like most investments, they should be carefully reviewed before you commit any dollars.

Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

The information in this article is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

1. Investopedia.com, 2022
2. Investopedia.com, 2021

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

Conquering Retirement Challenges for Women

Conquering Retirement Challenges for Women

Looking ahead can help you conquer these unique obstacles.

Gun Ownership and Your Homeowners Policy

Gun Ownership and Your Homeowners Policy

Gun owners need to make sure that their homeowners policy covers the full value of their firearm(s) as personal liability.

Please Leave Home Without It

Please Leave Home Without It

Concerns over identity theft continue to grow, especially with data breaches at major companies and financial institutions.

 

Have A Question About This Topic?







Thank you! Oops!

Whole Life Insurance Can Be an Asset For Balance

Even if you didn’t grow up on a farm, you’ve heard, “Don’t put all your eggs in one basket.”

Why Medicare Should Be Part of Your Retirement Strategy

How Medicare can address health care needs in your retirement strategy.

How to Spend Again After Saving

When people save, it brings life rewards. But sometimes after being on your best money behavior for a long time, you want to cut loose and spend. It can happen whether you’ve been saving to buy a home, rejoined the workforce or survived a global pandemic.

View all articles

Bi-Weekly Payments

This calculator estimates the savings from paying a mortgage bi-weekly instead of monthly.

Long-Term-Care Needs

Determine your potential long-term care needs and how long your current assets might last.

Contributing to an IRA?

Determine if you are eligible to contribute to a traditional or Roth IRA.

View all calculators

5 Smart Investing Strategies

There are some smart strategies that may help you pursue your investment objectives

Principles of Preserving Wealth

How federal estate taxes work, plus estate management documents and tactics.

Your Cash Flow Statement

A presentation about managing money: using it, saving it, and even getting credit.

View all presentations

Emerging Market Opportunities

What are your options for investing in emerging markets?

What Can a Million Dollars Buy You?

$1 million in a diversified portfolio could help finance part of your retirement.

When Do You Need a Will?

When do you need a will? The answer is easy: Right Now.

View all videos