Tweet
can someone explain stock dividends to me? is this something a beginner investor can get involved with?
-
-
Sure.
First make sure you understand what exactly a stock is, and then dividends are very simple. A stock is a piece of a business. Imagine dividing a burger franchise up into 1 million pieces, and then selling them all to different people. You would have a restaraunt that was owned by 1 million people.
Each share of stock is one part of ownership in a business.
And hopefully, it is a business that is earning money, not losing it! So these 1 million people have elected a board to run the restaraunt for them.
The question will eventually come up: "soooo what should we do with all this money we're making??"
And as far as the owners are concerned, it boils down to 2 answers:
1) Reinvest the money back into growing the company or
2) Divide the earnings out to the owners (dividend)
Say this fictional company made $1 million this year. The board would then ask those questions: reinvest? or pay a dividend?
If they elect to pay it all out as a dividend, each owner would get a $1 dividend. ($1 million/1 million shares = $1/share) If they elect to keep it all, they would reinvest the money and not pay a dividend. But most likely they would pay out a portion, and reinvest a portion. For instance, pay out $500k as dividends, and reinvest the other $500k. That would be $0.50 dividend/share.
Any investor can get dividends, because any investor becomes an owner of the business.
For instance, if you owned 1 share of Wal-Mart (WMT), last year the board would have paid out 4 dividends of $0.303 each. So you would have received $1.21 in dividends.
Mutual fund investors get dividends too, because the mutual fund has bought shares of some companies that pay dividends.
----------------------------------------------------------------
The short version:
-A stock is a piece of a business
-A dividend is a distribution of a portion of the earnings of the business to the owners
-And anyone who can buy a stock, can receive dividends -
Unless you actually meant a 'stock dividend' as opposed to a 'cash dividend.' Then it's just that the business elected to give out partial shares instead of cash.
Like the above company made $1 million this year, and wanted to pay out 50%, but didn't have the cash on hand to pay out $500k. If their stock was worth $10/share they could distribute out .05 shares per share (1 share for every 20 owned). This way, instead of distributing 50 cents of cash, they distribute 50 cents of stock.
It's not something you really go into investing seeking out, just something that periodically happens cause the business was strapped for cash at the moment.
Practically speaking there isn't much difference between a stock dividend and a reinvested cash dividend.Comment
-
You can also see when the company is paying the dividend, and you can see when you need to have purchased the stock by to become eligible to receive the dividend.
Ex-date is the date you need to have purchased the stock by in order to receive dividends
Payable date is the day when you get paid. (Unless otherwise stated, your dividends will get credited to your brokerage account, as far as I know)
A high dividend, greater than say, 5%, does not necessarily mean a company is doing well financially. Some companies pay dividends but should not necessarily do so. They just want to put out the image that they are doing ok, when in fact they are not.
Companies will often increase or lower their dividend, and you can read information about a compnay's history of dividends. A company who has paid a consistent dividend for 10 years is probably doing ok.
Do your own due diligence though. Learn how to make good investment choices and be able to explain them to someone why you are choosing that investment. I got too hasty on investing at first and lost a decent part of my principal in stupid investemnts and commission fees. I am now very careful before I pull the trigger on anything. good luck out there, it can be a bloodbath!
I think I got through that ok. If anyone sees a mistake in my explanation please let me know.Comment
Comment