What are dividends? Who does it make sense for to have stocks with dividends?

Dividends are the interest paid on the money used to buy stocks in business companies. Most corporations, large and small, new venture and mature operation pay a regular dividend. Normally this is an annual payout following soon on the heels of a company profit and loss statement. Dividends are a part of the reason for investing in stocks.

Buying stocks is one very popular way of making your money earn more money and earnings per unit of stock held, or dividend, can be an important part of that earning. There are 3 types of investor for whom dividends are a key factor in their choice of stockholding.

  • The employee shareholder. People often want to own part of the company for which they work. Companies often want their employees to take a bigger stake in the company through stockholding. Dividends and preferential share purchasing can be important motivators for employee shareholders. Dividend earnings are consider income and are therefore subject to tax.
  • The stock market traders like dividends because they are an important part of the profits from stockholding. Dividends payments are also a key indicator of stock value. The proportion of profit that a company puts into dividend payouts says a lot about the health and direction of a company.
  • The speculative investor who looks to maximize short term gains on the stock market will appreciate dividends in themselves but also but also as part of the overall profit to be taken from any stock transaction.

Timing is all-important when it comes to dividend payouts on stockholdings. There are 3 days in the company year to watch out for; the ‘record’ date, the ‘ex-dividend’ date and the ‘declaration’ date.

For all 3 types of stockholder it is vital that their ownership of the stock is complete and the stock certificates allocated properly on the record date. Failure to do this means the dividends will not be paid. The declaration date is the day on which the company announces what the dividend amount will be in terms of dollars and cents per share.

Companies whose stock is traded on the sock exchange are not legally bound to pay dividends. They are completely discretionary and if the company is having a particularly difficult trading period all of its cash may be directed to inward investment or simply used up in working capital, for an example of this look at the big 3 auto manufacturers in America in 2009.
Finally the ex-dividend date is normally a two-day period before the record date when stock buyers will not be eligible for dividends in the following year.

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