When you buy stock in a company, you now own a portion of the company and may be elligable to recieve a portion of the company’s profits. Not all stocks pay dividends. Many new companies prefer to reinvest their earnings back into the company instead of distributing them to shareholders. However many well established companies pay dividends to shareholders once every quarter. Here is what you need to know.
Most dividends are distributed quarterly – If you are planning on recieving dividends as income, know that you will only recieve them once every 3 months. Since company earnings are reported quarterly, it only makes sense to pay out the dividends quarterly, and not on a more frequent basis.
The dividend amount is the amount for one share of stock – If you see a dividend of $0.25. That is a 25 cent dividend for one share of stock. If you own 1000 shares, you will get paid $250 on dividend day (1000 x $0.25).
The dividend yield is the expected annual yield – If the dividend yield is 4%, then that means that the total amount of dividends paid out in one year is 4% of the value of one share of stock.
Stock price change will change the dividend yield – If the stock price goes up and the dividend stays the same, then the dividend yield will be less. If the stock price goes down, the dividend yield will be higher.
Dividends can change at anytime based on earnings – After the market crash in 2008, many well established companies including Bank of America, Citigroup, and GE cut their dividends to prevent bankruptcy. If you depended on this money as income, you would have been out of luck. However, as company earnings grow, dividends are expected to also increase.
You need to reinvest the dividends to maximize your return – Sure you can pocket the dividends as income. But if you reinvest the dividends by buying more stock, then you will get more dividends and more money. It all depends on what your financial goals are. Some brokers let you reinvest the dividends in stock automatically, while others do not do this for you. If your goal is to reinvest your dividends, find a broker that allows you to do this.