Dividend Stock Basics
An Introduction to Buying
Hereís a novel
idea: Buy stocks that pay you to own them! They are called
dividend-paying stocks, and you make money, even if they
donít go up much.
Better still, stocks
with solid dividend prospects donít go down as much
as other stocks, because when they try, the resulting
dividend yield boost attracts more buyers.
Dividends are cash payments that companies make to
shareholders, based on the number of shares that they hold. Most
U.S.-based companies pay dividends quarterly, that is, every three
months. But some pay monthly, while others pay annually or semi-annually
(every six months).
Besides for those periodic payments, companies sometimes
declare one-time or special payouts. These could be in addition to the
firmís regular payouts, or firms that donít pay regular dividends might
declare a special payout from time to time.
Normally, your broker adds the dividends received from
stocks to your cash account. Most brokers, however, also offer automatic
reinvestment plans. With these plans, your broker uses the dividends to
purchase additional shares, even if the dividend equates to only a
fraction of a share. Your broker may not charge for this service. If you
donít need the cash for expenses, you should always take advantage of
your brokerís dividend reinvestment services.
Dividend Dates Explained
date that dividend is announced.
first day that new buyers are not eligible to receive dividend.
Since it takes three business days to be the owner of record, the
ex-dividend date is two business days before the "owner of record"
Owner of Record Date:
date firm uses to determine who gets a dividend.
Payment Date: date dividend is
deposited into brokerage accounts.
Dividend Stock Types
paying stocks fall into three major categories: 1) Federal Corporate Tax
Payers. 2) Federal Income Tax Exempt Corporations, and 3) Master Limited
Partnerships (MLPs) and Limited Liability Corporations (LLCs).
Federal Corporate Tax Payers:
stocks issued by utilities, banks or other financial institutions, or
firms that make products or sell services. Their dividends are subject
to a 15% or 20% maximum federal income tax rate, depending on your
taxable income level. Dividend yields generally top out in the 4% to 5%
Federal Tax Exempt: firms
granted special status by U.S. laws and donít pay federal corporate
taxes as long at they pay a specified percentage of earnings to
shareholders in the form of dividends. Their dividends are not subject
to the 15%/20% limit and are mostly taxed at ordinary income tax rates.
These include Real Estate Investment Trusts (REITs) and
Business Development Companies (BDCs). Typical dividend yields 4% to
MLPs and LLCs: firms that trade
on major stock exchanges, the same as regular corporate stocks, but are
organized as partnerships. Tax returns are more complicated than for
corporations, but taxes of on a sizable portion of dividends
(technically distributions) can often be delayed until you sell. Typical
distribution yields 5% to 12%.
Dividend Yield Definition
The estimated dividend payouts over the next 12 months divided by the
price you pay for the shares. For instance, the yield would be 5% if you
pay $20 per share for a stock expected to pay $1 per share dividends over
the next 12 months.
Picking Dividend Stocks
Youíll always do best by picking stocks that increase
their payouts while you own them. When that happens, your dividend yield
increases and the dividend hike often drives the share price higher.
Conversely, a dividend cut hurts you two ways. Your yield drops and the
dividend cut usually pressures the share price.
How do you find the stocks most likely to hike their
dividends? Strategies for spotting the best candidates vary with
industries and with dividend categories. Weíll explore the details in
future articles. However, there is one universal truth that applies to
History: the Best Teacher
Baring a major management shift, firms with a consistent
dividend growth history covering many years are probably committed to
continuing that policy. These are always your best candidates.
Conversely, companies that havenít consistently increased dividends
probably prefer to use their extra cash for other purposes. They will
for hints about how to pick the best dividend stock