What are dividends?

Dividends are shares of a company’s profits, which are paid to its shareholders in proportion to the number of shares they own. Companies that pay dividends do so as a reward for investing, or as an incentive to attract new investors because selling stock raises cash for the company. In the U.S., companies paid dividends totaling $574.2 billion in 2022.

When a company announces a dividend, it’s expressed as a dollar amount per share. For example, Coca-Cola’s March 2023 quarterly dividend was $0.44 per share. The total dividend an investor receives is proportional to their investment in the company; the more shares they own, the greater the dividend payment. 

Not all companies pay dividends, and companies that pay dividends are free to increase, decrease, or even eliminate dividends. It’s not common for companies to decrease or eliminate dividends, but it does happen. The class of an investors’ stock can also affect dividends.

How do I find companies that pay dividends?

If you want to earn dividends on your investments, keep in mind that not all companies offer them, so you’ll want to do your research; stock charts can give you this information. Here are some common themes among companies that pay dividends you may want to keep in mind when you do your research:

• Established companies are more likely to pay dividends. Long-standing companies with predictable revenue streams often pay dividends. That includes oil and gas producers, automakers, pharmaceuticals, consumer goods businesses, and so on. These businesses, while often solidly profitable, may not be  growing fast, so their stock may not gain value rapidly. They might choose to ice the cake with dividends to attract investors.
  
• New or rapidly growing companies are less likely to pay dividends. Tech startups and fast-growing businesses don’t always have a lot of spare cash to pay dividends; they need to invest their profits into growing the business. And their shareholders hope to make money when the stock price spikes, so dividends may be less important to them. 

Some companies don’t pay dividends until they become dependably profitable. Some of the largest companies in the market, including Facebook, Google, and Amazon, don’t pay dividends. In fact, because dividend availability is closely tied to factors that affect a stock’s volatility, you’ll likely find that a diversified portfolio includes a mix of stocks that pay dividends and those that don’t.

Note that companies that pay dividends are free to increase, decrease, or even eliminate dividends. It’s not common for companies to decrease or eliminate dividends, but it does happen. 

How often are dividends paid?

Many companies have a regular schedule of dividend payment frequency. There’s no requirement for how often dividends are paid, so it’s up to each company. It’s also possible to pay unscheduled dividends, which may be special or additional dividends.

That said, most U.S. companies that pay dividends do so quarterly, though some dividends are paid monthly or semi-annually. Foreign companies, on the other hand, may not follow a regular cadence for dividend payments. And if you own dividend-paying stock via a mutual fund or exchange-traded fund (ETF), you’ll likely receive dividend payments quarterly or annually.

Each company has a dividend calendar, and there are four important dates to keep in mind for each dividend payment period:

• Declaration date: The date the company announces its next dividend payment.
• Ex-dividend date: The first day that new purchases of stock are not eligible for the announced dividend. This is sometimes called “trading ex-dividend.” You can still buy the stock, but you won’t receive the dividend for that period. If you want to receive it, the last day to purchase your stock is the day before the ex-dividend date.
• Record date: The business day after the ex-dividend date. In order to get the announced dividend, you must be “in the records” as a shareholder by this date. 
• Payment date: The date the dividend is paid to shareholders.

Why do investors have to buy stock before the ex-dividend date? Well, there’s a two-business-day settlement period for buying and selling stock. So to be in the records as a stockholder, you must buy the stock at least two business days before the record date, which is the business day before the ex-dividend date.

Here’s an example, using Coca-Cola’s March 2023 dividend:

• Declaration date: February 16, 2023
  
• Ex-dividend date: March 16, 2023
  
• Record date: March 17, 2023
  
• Payment date: April 3, 2023

If you were researching Coca-Cola stock in late February 2023, you’d learn about the upcoming dividend payment on February 16, and you’d have had until March 15th to purchase stock if you wanted to receive it. Remember, the ex-dividend date is the first date that new stock purchasers are not entitled to the dividend. So if you purchased stock on March 15 (or any day prior), you’d have been “in the records” by March 17, and then you’d have received the dividend on April 3rd. But if you bought your stock on March 16, you’d have had to wait until the next quarter to receive a dividend.

Stock markets, brokerages, and investment management companies publish dividend calendars, and they are typically easy to find online, including the New York Stock Exchange and Nasdaq websites. Upcoming dividend information is also available in stock charts.

What’s a typical dividend amount?

Dividend amounts vary. The board of directors sets both the dividend amounts and how often dividends are paid; those decisions are then approved by shareholder vote. Factors can include the company’s performance, cash needs, and the price of its stock. 
Investors often use a ratio called the dividend yield when evaluating dividends, rather than the dividend amount itself. The dividend yield is the annual dividend per share divided by the share price, and it’s typically easy to find online in a company’s stock chart. For example, the Nasdaq and Stash publish stock charts.

What happens after I receive dividends?

Regardless of how often dividends are paid by a company you invest in, you’ll have a few things to consider when you get that payment. 

• Dividends you earn are taxable. The IRS splits dividends into two categories: ordinary and qualified. Ordinary dividends are taxed at your regular income tax rate, while qualified dividends are taxed at the lower capital gains rate. 
• You can reinvest your dividends. Most dividends are paid out in cash. Many shareholders choose to reinvest their dividends by purchasing more stock, often by using a dividend reinvestment program (DRIP). With the power of compounding, that could add up to significant portfolio growth. Remember that there’s no guarantee that your investments will earn a return, and all investments carry the risk of losing money. 

Investing in companies that pay dividends is one way investors might aim to earn a return on their investment. If it sounds good to you, remember that understanding a company’s dividend calendar is just as important as knowing how often dividends are paid so you can make stock purchases in time to earn them. And once you get those payments, be sure to plan ahead for taxes, as well as what you’ll do with the money. If you invest with Stash, you can enable DRIP to automatically reinvest your dividends so you keep your money working for you.

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The post How Often Are Dividends Paid to Shareholders? appeared first on Stash Learn.

If you invest in stocks and ETFs, you might be surprised when you receive something called a dividend. A dividend is one way you earn money on your investments. In fact, if you receive one in your Stash portfolio, you’ll get an email letting you know. We’ll explain what a dividend is, and how you can use dividends to increase your investments with a tool called DRIP.

What is a dividend?

A dividend is a distribution of a company’s earnings, paid out to investors. Say you purchase a share of a company, and that company earns a profit one quarter. The company can decide to pay out a part of those profits to shareholders in the form of dividends. That amount is determined by the value of the company’s profits and by how many shares you have. The more shares you have, the higher your dividends are likely to be. (Note: Not all companies pay dividends.)

Dividends are almost always paid out in cash, but occasionally they’re distributed as additional shares of stock. And these payments usually occur four times a year, at the end of every quarter. 

What is dividend yield and what does it mean?

When you’re researching the stocks and ETFs that you want to invest in, one element you may want to keep in mind is something called dividend yield. It can help you measure how much cash you’ll get back in dividends for every dollar you invest in the company. Dividend yield is a percentage that is calculated by dividing the annual dividend per share by the price per share.

So, for example, if the annual dividend per share is $2.50 and the price per share is $100, the dividend yield will be 2.5%. The dividend yield of a stock is directly affected by the company’s share price. In fact, there is an inverse relationship. When a company’s stock price goes up, the yield will go down. And when the share price goes down, yield will go up. As of March 2020, the average dividend yield of the S&P 500, the market’s main bellwether, was 2.31%.

The dividend yield can be found on financial websites with stock information. On Stash’s website, you can look at single stocks and ETFs where you’ll be able to find the historical performance of the investment, as well as dividend yield and other information.

How can you use your dividends?

Of course, one way you can use dividends is to take the cash and spend it, or put it towards savings. But another option is to reinvest those dividends. Cash dividend payments tend to be affected more by inflation, whereas stock values can often increase at rates above inflation over time—though that’s not necessarily guaranteed.

Some brokerages, like Stash, offer a plan called DRIP so that you don’t have to manually reinvest dividends. DRIP stands for “dividend reinvestment plan,” and it allows investors to automatically reinvest dividends from the companies in which they invest in, as those dividends are paid out. You can turn on DRIP with Stash and automatically reinvest dividends in your portfolio. 

By reinvesting the cash you receive as a dividend, you can also increase the impact of compounding over time. Compounding is one of the most important concepts for new investors. It’s the echo effect that earnings and dividend payments can have on your total investment holdings, allowing them potentially to really add up over time.

Stash and DRIP

If an investment in your Stash receives a dividend, you’ll be notified via email. To turn on DRIP, go to “Invest” in the app and select the gear icon at the top right of the screen.Then select dividend reinvestment and enable the tool. When you receive a dividend from an ETF and you have DRIP turned on, the dividend will automatically be reinvested as either a fractional share or whole share of that ETF, depending on the value of the dividend. The same goes for a stock dividend.

You can start investing, and receiving dividends on those investments,on Stash with any dollar amount today.

The post Congrats, You Received a Dividend! Here’s What That Means and How You Can Use It. appeared first on Stash Learn.

DRIP is an acronym for dividend reinvestment plan, and it’s a program that many brokerages offer, allowing investors to automatically reinvest dividends from the companies they invest in, as those dividends are paid out.

Automatically reinvesting dividends can be a smart way for long-term investors to continue adding new shares to their holdings, which in turn can allow compounding to increase your assets. 

What is a dividend?

A dividend is a share of a company’s profit, distributed as cash, usually on a quarterly or annual basis. The amount of your dividend payout is in proportion to the number of shares you own. If you own a lot of shares, your dividend will be larger than if you own just a few shares, or fractions of shares.

Not all companies pay dividends. In fact, it’s very often the largest and most established businesses that do. Companies in the S&P 500 index reportedly paid about $500 billion in dividends in 2019. 

Good to know:  ETFs are baskets of stocks, some of which may pay dividends. If your portfolio includes an ETF with dividend-paying stocks, DRIP will automatically use dividends from those stocks to purchase more shares of the fund. 

DRIP and compounding

With DRIP,  your dividends are reinvested automatically, rather than being distributed to you as cash. As a result you’re actually purchasing additional shares, or fractions of shares, depending on how big your dividend payment is. (You can find out more about fractional shares here.)

By reinvesting the cash you receive as a dividend, you can also increase the impact of compounding over time. Compounding is one of the most important concepts for new investors. It’s the echo effect that earnings and dividend payments can have on your total investment holdings, allowing them potentially to really add up over time. 

Here’s an example of how compounding works. Let’s say you start with savings of  $100 and put $50 a month away for ten years, with an annual return of 5.25%. You’ll have slightly more than $8,000, but you’ll only have put away $6,100. Compounding could add more than $1,900 to what you save.

DRIP can potentially increase compounding beyond the annual rate of return described above, by adding dividend payments to your principal on a regular basis. 

How DRIP works on Stash

Stash is excited to present its new DRIP feature, which will automatically reinvest dividends in the stock or fund you own. 

Here’s how to turn it on.

Go to the home screen in the app, and click on the Invest tab. Then click on the gear icon in the upper right corner to manage your portfolio. Under Manage your Account, you’ll see a tab for Dividend Reinvestment. Click on that to enable DRIP.

If you’ve invested in companies that pay dividends, or in funds that invest in companies that do, your dividends will automatically be reinvested in the fund or stock for you. 

The post Everything You Need to Know About DRIP appeared first on Stash Learn.