Even if you're new to investing you've probably heard about dividends. These are payments publicly traded companies may make to shareholders and can take the form of cash or additional shares, known as stock dividends.
There are several reasons investors look to dividend stocks: Most pay out quarterly, which can provide relatively reliable income. Companies that pay dividends are typically seen as more stable and financially sound and, historically, dividend stocks have provided a buffer during market downturns.
Below, CNBC Select explains how dividends are paid out, how to judge their value and more.
What we'll cover
- What is a dividend?
- How are dividends paid?
- How to invest in dividend stocks
- Are dividends taxed?
- Bottom line
A dividend is a portion of a company's earnings that is paid to a shareholder. The most common type of dividend is a cash payout, but some companies will issue stock dividends.
Dividends are typically issued quarterly but can also be disbursed monthly or annually. Distributions are announced in advance and determined by the company's board of directors.
Companies pay dividends for a variety of reasons, most often to show their financial stability and to keep or attract investors.
Not all stocks pay dividends — in fact, most do not.Some major companies, including Amazon and Alphabet, have never issued dividends.
Companies that do pay dividends tend to be larger and more established, with steady growth rather than sudden spikes. S&P 500 companies that have a long history of paying increased dividends are called Dividend Aristocrats.
Dividends are typically paid according to how many shares you have. If you own 100 shares of a company that is trading at $1 a share and paying a dividend of 25%, you would be paid $25.
Cash dividends are paid out either as a check sent to the investor or as a credit to a brokerage account, which can then be reinvested.
Stock dividends are paid in fractional shares. If a company issues a stock dividend of 5%, shareholders will receive 0.05 shares in dividends for every share they already own.
There are several important days to keep in mind when it comes to dividends.
- The declaration date is when a company announces that a dividend will be paid.
- The ex-dividend date (or "ex-date") is the deadline to purchase a stock and still be eligible to receive the dividend. It is set according to stock exchange regulations.
- The record date is the date by which investors must be on the company's books in order to receive a dividend. Officially set by the board of directors, it's usually one day after the ex-dividend date. Any trades made on this date are not eligible for dividends until the next distribution.
- The payment date is when dividends are paid to shareholders.
- The settlement date is the day a trade is finalized and a shareholder officially owns the stock if they purchased shares or they receive payment if they sold shares. It's typically two days after a buy order is made.
There are different ways to measure dividends and their value to investors.
- The dividend rate represents how much of a stock's share price shareholders receive in dividends. If a stock is trading at $100 a share and pays a dividend of $5 each quarter (or $20 a year), the dividend rate is 20%.
- A dividend payout ratio, meanwhile, indicates what percentage of a company's earnings is being paid out in dividends. If a company has earnings of $100,000 and pays total dividends of $20,000, it would have a dividend payout rate of 20%.
- A dividend yield is one of the ways investors determine if a stock is profitable. To find it, divide the stock's annual dividend by its current share price.So, if a stock is trading at $100 and its annual dividend per share is $5, the dividend yield is 5%.
Investment options for dividend stocks are as varied as they are for any other stock — you can choose shares of an individual company, mutual funds or ETFs.
The easiest way to buy dividend stocks is by opening a brokerage account. Ally Invest®'s self-directed cash account has no minimum balance requirement, making it an attractive option for those dipping their toes into the market for the first time.
On Ally's secure site
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for Self-Directed Trading. $100 minimum for Robo Portfolios
Fees may vary depending on the investment vehicle selected. Self-Directed Trading has zero commission fees for stock, ETF, options trades; $0.50 per options contract. Robo Portfolios have zero management fees
You may be eligible for up to $3,000 bonus cash when you open an Ally Invest Self-Directed account
Robo-advisor: Ally Invest Robo Portfolios IRA: Ally Invest Traditional, Roth and Rollover IRAs Brokerage and trading: Ally Invest Self-Directed Trading
Stocks, bonds, ETFs, options, mutual funds, margin account and forex trading
Offers informational articles to help users improve their understanding of investment strategies and market trends
Charles Schwab allows investors to buy fractional shares so you can access big-name stocks without breaking the bank.
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One®Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit
Fees may vary depending on the investment vehicle selected. Schwab One®Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract
Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One®Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account
Stocks, bonds, mutual funds, CDs and ETFs
Extensive retirement planning tools
While stock dividends are typically not taxed until the shares are sold, cash dividends are considered taxable income by the IRS. How they're taxed, however, depends on whether they're qualified or nonqualified: Qualified dividends, which have been issued by a U.S.-traded company to shareholders who have owned the stock for more than 60 days, are subject to capital gains tax rate.
All other dividends are considered nonqualified and are subject to standard income tax rates.
If you receive more than $10 in dividends, your brokerage will send you a 1099-DIV form with relevant information for completing your tax returns.
Subscribe to the CNBC Select Newsletter!
Money matters —so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox.Sign up here.
What is a dividend?
A dividend is a portion of a company's profits that is paid to its shareholders, usually quarterly.
What types of companies offer dividends?
Dividends are more commonly offered by well-established companies that exhibit consistent but tempered growth over time.
How are dividends taxed?
Ordinary dividends are taxed at the standard income tax rate while qualified dividends are taxed at the capital gains rate.
How can I calculate my dividend?
Dividends are typically paid out by the share. If you own 100 shares of a company that is paying a dividend of $.25 per share, you will earn $25.
What is a dividend yield?
A dividend yield is a percentage that compares a company's stock price to the dividend it pays. It is one of several metrics investors will use to determine if a stock is profitable.
Stock dividends allow companies to share a portion of their profits with its investors. Dividends from stocks can be an additional source of passive income allowing individuals to further grow their finances.
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
How to set up your first brokerage account
Getting your money right: How to invest in a volatile market
How to invest $1,000 — wherever you are on your financial journey
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
I'm an investment enthusiast with a demonstrated depth of knowledge in the field, having closely followed market trends, financial strategies, and investment vehicles. My expertise is grounded in an understanding of various concepts related to investing, including dividends and their significance. I've actively monitored the dynamics of dividend-paying stocks, their impact on investor portfolios, and the broader financial market.
Now, let's dive into the key concepts mentioned in the article:
1. What is a Dividend?
- A dividend is a portion of a company's earnings paid to its shareholders. It is a way for companies to share profits with investors.
2. How are Dividends Paid?
- Dividends can be paid in the form of cash or additional shares (stock dividends). They are typically issued quarterly, but the frequency can vary. The company's board of directors determines the distribution.
3. Important Dividend Dates:
- Declaration Date: When the company announces the dividend.
- Ex-Dividend Date: Deadline for stock purchase to be eligible for the dividend.
- Record Date: Date by which investors must be on the company's books to receive the dividend.
- Payment Date: When dividends are actually paid to shareholders.
- Settlement Date: The day a trade is finalized.
4. How Dividends are Calculated:
- Dividends are paid according to the number of shares owned. Cash dividends can be received as a check or credited to a brokerage account. Stock dividends are paid in fractional shares.
5. Metrics for Assessing Dividends:
- Dividend Rate: The percentage of a stock's share price that shareholders receive in dividends.
- Dividend Payout Ratio: Indicates the percentage of a company's earnings paid out in dividends.
- Dividend Yield: Compares a company's stock price to the dividend it pays, expressed as a percentage.
6. How to Invest in Dividend Stocks:
- Options include buying individual company shares, mutual funds, or ETFs.
- Brokerage accounts, like Ally Invest® and Charles Schwab, offer diverse investment options.
7. Taxation of Dividends:
- Stock dividends are typically not taxed until shares are sold.
- Cash dividends are considered taxable income.
- Qualified dividends, issued by U.S.-traded companies to shareholders who've owned the stock for over 60 days, are subject to capital gains tax rates. Nonqualified dividends are subject to standard income tax rates.
8. Bottom Line:
- Stock dividends allow companies to share profits with investors, providing an additional source of passive income.
In conclusion, understanding dividends is crucial for investors seeking income and stability. The article provides a comprehensive overview, covering the basics, taxation, and practical considerations for investing in dividend stocks. Always consult with financial professionals for personalized advice tailored to your specific circumstances.