What Are Dividends?

Table of Contents

  1. So why exactly do companies pay this token of reward to their shareholders??
  2. How often do companies pay dividends?
  3. How do you get a dividend?
  4. Should I only focus on buying dividend the paying stocks?
  5. Should you be reinvesting your dividends?
  6. How can you find the dividend-paying stocks and funds?
  7. Do dividends attract any taxes?


One of the simple ways of investments that could boost your portfolio is by buying the stocks of dividend-paying companies or funds. A profitable company might want to share its earnings with its shareholders. These payouts are offered to the shareholders in the form of what’s called the ‘dividends’. 


Dividends are like the little bonus you receive from the companies for investing in them. As per Siblis Research data, the average dividend payout for U.S. stocks was 1.87 percent of one’s investment. Dividends are believed to positively influence your long-term investment outcome. Dividends could help you make profits even when the market is low.


For example, if in the previous year you had invested $10000 in a fund that pays out the average 1.87 percent dividend, you’d earn $187.0, no matter how the market performed that year. 


So why exactly do companies pay this token of reward to their shareholders?


While the predominant part of profits is retained by the companies to allocate it to their growth, expansion, or new product or service launches, the remainder is paid to the shareholders in the form of dividends. But not all companies pay them. So why exactly do companies offer dividends?


The major objective of companies is to encourage the investors to invest with them and to entice the existing investors to stick around.


Sometimes the stock prices of a well-performing company you’ve invested in could drop- though, regardless of bumps, the stock market has grown significantly over time. Thus, there’s no guarantee that you will achieve a positive outcome on your returns. But, giving out dividends can help a company retain its credibility and public trust, which in turn draws in more investors.


Dividend payers tend to be larger, more established companies that can offer a slice of their profits. And, offering a dividend on its own could make a stock more desirable, thus raising demand (and thus the value) of a stock.


Typically start-ups or smaller companies don't pay you dividends because new companies or smaller firms often require reinvesting their entire earnings to grow their business over time, rather than pay them out to shareholders.


How often do companies pay dividends?


The dividends are issued based on the decision taken by the board of directors of the company. They can opt to pay them over various time frames and at different prices.

Essentially there’s no set rule to decide these time frames. Most U.S. firms offer dividends four times a year (or quarterly).  Some companies choose to pay either once a year, twice a year, or at no specified time frame.


How do you get a dividend?


Nothing really! Dividends are just like the rewards that you get for investing in a company’s stock. Plus they aren’t usually prorated, which means you’ll get the same amount if you invested for the entire quarter as you would have gotten if you invested the day before the quarter closed. You will also have chances to receive dividend payouts if you invest in funds that hold shares of the company but do not hold the individual shares of the company. 


Make sure you check your investment prospectus or fact sheet to know of any dividends that you may receive. 



Should I only focus on buying dividend paying stocks?

 

Dividend-paying companies are mostly well-established companies that would have been performing well over the years. And they are common in certain specific sectors like telecommunications and utilities. If you just stick with those sectors of companies, you’re allocating too much of your portfolio to the same group.


Thus, the stock-market experts advise against investing solely in these stocks but having a diversified portfolio of dividend, non-dividend stocks, and other funds. It lets you profit from the steady growth of well-established companies and the potential growth of start-ups or smaller businesses. While they may appear riskier, you may expect more gains faster.


Should you be reinvesting your dividends?


Typically, as an investor, you can choose either to draw the dividends received or reinvest them. Some dividends can seem so less in value that you might be tempted to just keep the money in your pocket. But, there’s a reason why experts recommend reinvesting dividends. According to a report by Hartford Funds, “84% of the total return of the S&P 500 Index1 can be attributed to reinvested dividends”. 



Reinvesting your dividends makes you own more shares without paying any more from your own pockets. This will make your overall portfolio value grow. It also results in you regularly investing in a company or fund which is similar to the powerful investing principle called “dollar-cost averaging.”


Essentially when you invest more often, you would be able to afford more shares at low prices. With this, you’d be overall paying less per share, thus improving your long-term returns. Just in the last decade, it was observed that people who reinvested dividends into S&P 500 funds got over a 2% increase in gains than those who opted for dividends payout in cash. 


How can you find dividend-paying stocks and funds?


Online platforms like Kiplinger, and Morningstar, or the Securities and Exchange Commission websites help you find the data of dividend paying firms and funds. Brokerages and investment companies may also help you find their dividend-paying stocks and funds by listing them on their websites.


Do dividends attract any taxes?

Dividends are a form of income and therefore, you may be taxed on your dividends. Also, did you know If you hit the necessary reporting thresholds, your broker should give you a 1099-DIV form that you can use to complete your taxes? 


Use Reconcile to auto-calculate your capital gains taxes in real-time without any fuss!


Dividends can help grow your investments in the long-term when reinvested over years or decades. Thus it’s always beneficial to make the stocks and funds that earn you dividends an essential part of your diversified investment portfolio.