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What Is a Dividend?

Investing in the stock market can be an exciting proposition. Stocks provide an opportunity to make your money work for you. In fact, there are two ways to earn money when you own a stock.

The first is through capital appreciation, which is to say that the value of the stock you own increases. As a company becomes larger and more profitable, your tiny slice of the pie—hypothetically—gets larger as well. However, in order to make a profit from the stock, you’ll have to sell it at a higher amount than you initially paid.

The second way to make money on a stock is through a dividend payment.

What is a dividend? That’s when a company periodically gives its shareholders a cash payment—it may also come in the form of more stock shares. The size of that dividend depends on the company’s dividend rate and how many shares you own.

Although not all companies pay dividends, there are some investors who choose to target stocks that do pay dividends.

When investors talk about dividend payments, they are generally referring to the dividends paid out on the common stock of public companies.

A public company is one that offers shares of ownership for sale to the general public that can be bought and sold on an exchange. A stock represents some small fraction of ownership in that company, allowing investors to partake in potential future profits.

A dividend payment could also refer to payments made by a private company to its owners or private shareholders, but that is not the most common use of the phrase. This article will stick with the public company, common stock scenario.

What Is a Dividend Payment?

A dividend payment is a portion of a company’s profits paid out to the shareholders of that company. Dividends can come in the form of cash or as additional stock.

The former is called a cash dividend. The latter is called a stock dividend.

Dividend payouts can happen on a fixed schedule, such as once per quarter, or once or twice annually—though a company can issue them at any time. Unscheduled or spontaneous dividends are sometimes known as special dividends or extra dividends.

A company is not required to pay out a dividend. There are no established rules for dividends; it’s completely up to the company to decide if and when they pay them. Some companies pay dividends like clockwork, and others never do.

Even if they are paid out on a regular schedule, dividends are not guaranteed. A company can skip or delay dividend payments as needed. For example, a company may withhold a dividend if they had a quarter with negative profits.

Though, such a move may upset the shareholders of that company, and that could ultimately reflect in the share price.

When a dividend is declared by a company, shareholders are usually notified by a press release, and the news quickly becomes public. By this time, the company will have set a record date. If you own that stock on the record date, you are entitled to the dividend payment. (The record date is not usually the payable date.)

The day following the record date is called the ex-date, which is the day that the stock begins trading what is called ex-dividend. That means that if you were to buy a stock on or after an ex-date, you are not entitled to receive the most recent dividend payment.

Dividends can be paid out via a check, a deposit into the account where the stock or fund is held, or sometimes, be reinvested into the stock or fund. To find out how your dividend will be paid out, check with the financial institution where you invest.

What Is a Dividend Yield?

A dividend yield (or dividend rate) is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. A stock’s dividend yield can be useful for comparing stocks that trade for different dollar amounts and with varying dividend payments.

The amount you receive in a dividend payment is usually based on the number of shares you own. For example, if a stock pays a quarterly dividend of $1 per share and you own 50 shares, you would receive a dividend of $50 each quarter.

But the absolute dollar value of a dividend may not be the most important element. Investors also consider how much they paid for the stock. For example, consider two stocks that both pay a $1 quarterly dividend.

One of these stocks costs $95 per share and the second costs $165. The stock that costs $95 has a better dividend yield or dividend rate than the one that costs $165.

Here’s how to calculate the dividend yield for a stock:

Annual Dividend ÷ Stock’s Price Per Share = Dividend Yield

Let’s use the example from above to determine the dividend yield for each. Remember, both companies are offering a $1 quarterly dividend, which is a $4 annual dividend.

The company with the $95 per share price has a dividend yield of 4.2% ($4 annual dividend ÷ $95 per share = 4.2%). The company with the stock valued at $165 has a yield of 2.4% ($4 annual dividend ÷ $165 per share = 2.4%).

While this formula is useful for comparing dividend yields, there may be other factors to consider when deciding on the better investment. There are many reasons that a company could have a high or low dividend yield, and some insight into why is necessary for analysis.

Why Do Investors Buy Dividend Stocks?

In general, investors would only buy shares of a stock if they believed that investment would be profitable at some point in the future. Therefore, the chance to earn dividends will likely factor into their overall analysis.

It may be helpful to understand that when you hear the performance of the stock market (or a stock) quoted as an annualized number, this figure usually includes both the average price increase of the stock market and the dividend payout.

For example, you could hear, “These stocks are up 10% on average.” It’s possible this could mean that 7% of the 10% is from capital appreciation and 3% from the dividend payment.

Stocks whose prices go on meteoric rises are exciting to watch and get a lot of airtime in the media, but the dividend yield is also an important element of overall returns. The dividend should be considered in an analysis of stocks. Together, price appreciation and dividends make up a stock’s total return.

There are a number of reasons that investors target stocks with a high dividend yield. For one, they could be doing it for strategic reasons.

For example, perhaps their independent analysis shows that stocks with substantial dividends will fare particularly well in the current market environment or that dividend-paying stocks will perform better than average in the foreseeable future.

And then others may simply be including the dividend payout as part of a greater overall analysis on whether to buy a stock. Companies paying a similar dividend could be different in many other ways, and how much dividend a company pays should be considered along with other factors.

Other investors may target dividend-paying stocks as a way to create income. They may be doing this as a way to replace a salary—e.g., in retirement—or to supplement their current income. Investors who are following an income-producing strategy tend to favor dividend-paying stocks, government and corporate bonds, and real estate investment trusts (REITs).

Another reason that investors may target dividends is because they may receive favorable tax treatment depending on their situation, how long they’ve held the stock, and where that stock is held.

Qualified dividends are taxed at long-term capital gains rates, which are lower than ordinary income tax rates. Depending on your income, qualified dividends are taxed at a rate between 0% and 20% . Non-qualified dividends are typically taxed at the same rate as a person’s ordinary income tax rate.

What makes a dividend qualified? This part can get a bit confusing. For the IRS to consider a dividend qualified, they require that the stock investment be held for more than 60 days during the 121-day period that begins 60 days prior to the ex-dividend date—the day after a corporation’s board declares a dividend payment to shareholders.

Basically, stocks that are held for a short time frame may be subject to a higher tax rate. Stocks held for longer are subject to the lower tax rate. You can find more information about qualified and non-qualified dividends through the IRS .

Your dividend payments are summarized on the Form 1099-DIV, which is sent out by your financial institution. And if you have multiple bank or trading accounts and receive dividends from many financial institutions, you should receive a Form 1099-DIV from each institution.

Note that if you own stocks through a qualified retirement account specifically designed for retirement planning, such as a traditional or Roth IRA, no annual taxes are assessed on dividend payments and capital appreciation, since these accounts enjoy tax-free growth. Though you may be taxed upon withdrawal.

Build Your Strategy

Ready to try your hand at investing in stocks and earning dividends? You may want to consider SoFi Invest, which offers options depending on your preferred investing style.

SoFi active investing is an online trading platform that allows you to buy and sell individual stocks and exchange-traded funds (ETFs). Best of all, there are no trading or transaction fees to do so.

This may be especially important for small or new investors because trading fees can often take up a higher proportion of the total amount invested with smaller dollar figures than with larger dollar amounts.

If you’d prefer more help, SoFi automated investing might be a better fit. After answering questions about your goals and risk tolerance, SoFi helps you choose investments and create a diversified portfolio using low-cost ETFs. There’s no fee to get started and they’ll also maintain your investments at no additional cost.

Whether you’re targeting dividend stocks or some other strategy—or just looking to get started, SoFi Invest has an option that may be right for you.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Popular Monthly Dividend Stocks

You might not guess it from the way many investors base their mood on the day-to-day movements of the stock market, but for most people, an investment account represents money that’s being put away for the long term.

It isn’t like a bank account, with money regularly going in and out. The profits and losses those investors see on their statements—especially younger savers—won’t be realized until they actually sell their holdings. And that could be years or even decades down the road.

For those who are looking for money right now, however, there is a way to generate income from a stock portfolio on a more predictable basis—even if you’re just starting out. And that’s by investing in stocks that pay a dividend.

How Does Dividend Investing Work?

A dividend is a portion of a company’s profits that’s paid to its investors, as directed by the board of directors. Dividends usually are paid quarterly, but they also may be distributed monthly or yearly.

Most dividends are cash payments made on a per-share basis. For example, if the company pays a dividend of 30 cents per share, an investor with 100 shares of stock would receive $30.

The “dividend rate” is the total expected payments for the year, plus any non-recurring payments the investor might receive during that same period. If the investor receives $30 monthly, the dividend rate is $360.

Why would a company make dividend payments? It’s often a sign that the company’s growth has begun to slow. Instead of reinvesting in itself, the company may decide to share its profits in an effort to keep stockholders from moving on to something else.

It’s a normal part of the business cycle—and it’s generally thought of as a positive sign when a company is stable enough to offer its investors reliable dividend payments.

Dividends aren’t guaranteed, though; a company can skip or stop making payments at any time. That’s pretty rare, however, which is why so many older investors make dividend payments part of their retirement plan: They look at it as a dependable way to replace some of their income when their regular paychecks go away.

Younger investors also might use their dividends to help pay the bills—or to save for a big vacation or some other hefty purchase. But those who don’t need the income may choose to reinvest the money with the idea of boosting portfolio growth.

The more dividends they reinvest in the stock, the more shares they can own. And the more shares they own, the larger their future dividends could be.

No matter what the purpose behind the purchase might be, it’s usually a slow and steady process compared to investing in growth stocks, which are stocks that rarely pay dividends because the profits are reinvested in the company. Still, investors should take care when picking dividend-paying stocks.

How to Invest in Dividend Stocks

So, what should an investor look for in dividend-paying stocks? That’s a tricky question. Did we mention that there are no guarantees and all investing comes with risk?

Even with help from a financial professional, investors may want to look at several criteria before moving forward.

Here are a few things investors can consider when looking for the best dividend stocks:

Dividend Yield:

Investors often go by a stock’s “dividend yield” to determine its potential. Yield is presented as a percentage (annual dividends per share divided by price per share) that represents the return per dollar invested that a shareholder receives in dividends.

Stocks that offer the highest yields may appear to be the most promising, but that number can be misleading. The dividend yield could be rising because the share price is falling—and that can be a sign that a company is struggling. So yield is an important factor to follow, but it shouldn’t necessarily be the only one.

Dividend Payout Ratio:

Another number to look for is the “dividend payout ratio” (annual dividends per share divided by earnings per share). This percentage can help determine if the dividend payments a company is making make sense in the context of its earnings.

Again, a high ratio is good, but an extremely high ratio can be difficult to sustain. If a stock is of interest, it may help to check out the company’s payout ratios over an extended period.

Company Stability:

Investors also may wish to focus on stable, well-run companies that have a reputation for paying consistent or rising dividends for years.

To be considered a “dividend aristocrat,” a company must have paid its dividends for at least 25 years with a steady increase each year.

Think about the products people use every day and the businesses that are expected to be around for a long, long time: popular fast-food restaurants and snack brands, soft drink companies, well-known big box stores, and utility companies.

Keep in mind a company’s future prospects, though, not just its past success, when shopping for high-dividend stocks.

Payment Schedule:

For those who are drawn to the growth potential made possible through reinvesting, timing also may be a factor.

Stocks that pay monthly dividends are less common, but they can make it possible to purchase additional shares more quickly. (They also can help those who use their dividends for income to get their bills paid on time every month.)

Real estate investment trusts (REITs), many of which distribute dividends monthly, are a popular choice for those who want consistent payments.

Tax Implications:

A “qualified dividend” is a type of dividend that qualifies for a favorable or a lower tax treatment. A “non-qualified dividend” doesn’t get that lower tax preference and is taxed at an individual’s normal tax rate.

Investors will receive a Form DIV-1099 when $10 or more in dividend income is paid out during the year. (If the dividends are in a tax-advantaged account (an IRA, 401(k), etc), the money will grow tax-free until it’s withdrawn.)

What Are Some Other Pros and Cons?

We’ve discussed two of the biggest pros to investing in dividend stocks: passive income (income that requires little to no effort to earn and maintain) and reinvestment (using dividend payments to buy more stocks—or to get into other investment options).

Another plus for those who choose solid dividend stocks is that they likely will receive payments from those investments even if the market takes a dip or dive.

That can help insulate investors during tough economic times. It might keep those who are making regular or occasional withdrawals from their stock portfolio from having to sell at a low to get the money they need.

It also may allow investors who don’t need the income to buy stocks at a lower price while the market is down. Stock in a mature, healthy company also may be less vulnerable to market fluctuations than a start-up or growth stock.

But no investment strategy is perfect, and there are some disadvantages to dividend stocks. Dividends are not obligations, and a company can decide to cut its dividends at any time. It could be that the company is truly in trouble or that it simply needs the money for a new project or acquisition.

Either way, if the public sees the cut as a negative sign, the share price could fall significantly. And if that happens, an investor could suffer a double loss.

Then there’s the matter of double taxation. First, the company must pay taxes on its earnings. Then the shareholder must pay taxes again as an individual.

Finally, choosing the right dividend stock can be tricky. As noted above, the metrics are quite different than they are for selecting a growth stock.

This isn’t about finding the next big thing—but you don’t want the big thing that’s nearly over. While perusing the possibilities it may help to remember that what enables a company to stay healthy typically keeps its dividends healthy, too.

Dividend-paying stocks can be used to grow and diversify your portfolio and to help shield your savings in a downturn. But they aren’t foolproof.

Like any stock, they can be subject to company-specific, sector-specific, and general market risks. And as with any stock purchase, it’s important to consider the big picture before making the investment.

You can be as hands-on or as hands-off as you like when you invest with a SoFi Invest® account. SoFi provides a live human advisor to answer questions at no extra cost, so you can always get the help you need.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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