As you might know, the term “stock” refers to fractional share of ownership in a business. A stockholder or shareholder is an individual or institution that owns a least one share of a company’s stock. Dividend Stocks are stocks that pay out part of its profits to it shareholders when the corporation earns a profit or surplus. From the get-go, dividend stocks sound like an excellent idea because there is technically no limit to the money you can earn from this type of investment. And it’s true – these stocks can provide high yields if you know what to look for and how to work through the market. Let’s take a look at some of the facts when it comes to dividend stocks.
Dividends are generally paid on a quarterly basis – however, some companies pay dividends annually. These dividends must be declared each time they are paid and follow a specific process: the declaration date, when the company’s Board of Directors announces the intention to pay a dividend, the date of record, which states the day upon which stockholders are entitled to the imminent payment, and the payment date, which is when the stockholders are actually paid the dividend.
Types and What to Look For
There are three main types of dividend stocks: cash, property, and one-time. Cash dividends are regularly paid out of the company’s profits to the shareholders; property dividends can either include shares of a subsidiary company or physical assets such as inventories that the company holds; one-time dividends refer to the times when a company pays a special one-time dividend, such as in times of the sale of a business or liquidation of an investment. These one-time payments can be in the form or cash, stock or property dividend stocks. In certain cases, one-time dividends can be return of capital payments – as opposed to a payment of the company’s profits – return of capital payments refer to the return of money shareholders have invested in the business. Thus, these rare type of dividends are tax free!
If you’re planning on investing in dividend stocks, you should plan on finding ones that have a few specific characteristics. Dividends should have a payout ratio of 50% or less, with the rest going back to the business for its future growth. The dividend should yield between 3% and 6% and the company should have generated positive earnings for the the past few years with little or no corporate debt. These factors combined will provide a better protection against recession and falling payouts, and are good basic rules for new investors to live by when it comes to dividend stocks.
For more information, check out what experts have to say in the “Dividend Stocks” section of our website for the latest tips and trends.