Growing Wealth Archives

May

2025

How to Calculate a Dividend Payout Ratio

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

A dividend payout is the dividend amount a shareholder can expect, based on their number of shares. The dividend payout ratio is the ratio of total dividends paid to shareholders relative to the net income of the company.

Investors can use the dividend payout formula to gauge how much a company is paying to shareholders versus reinvesting in the company for growth, to pay off debt, and so on.

Some companies pay out some or all of their earnings as dividends; but some companies don’t make any dividend payments. If dividends are an important part of your investing strategy, you may also want to understand how different types of dividends are taxed.

Key Points

• Some companies pay dividends, a percentage of earnings, to shareholders.

• The dividend payout ratio is the amount of dividends relative to total net income.

• Knowing the dividend payout ratio can help investors gauge the overall health of a company.

• Dividend payout ratios vary widely by company. Some companies distribute some, all, or none of their earnings to shareholders.

• Ordinary dividends are taxed as income; qualified dividends are taxed as capital gains.

Understanding Dividends and How They Work

Before calculating potential dividends, investors will want to familiarize themselves with what dividends are.

A dividend is when a company periodically gives its shareholders a payment in cash, or additional shares of stock, or property. The size of that dividend payment depends on the company’s dividend yield and how many shares you own.

Many investors look to buy stock in companies that pay dividends as a way to generate regular income, in addition to stock price appreciation. A dividend investing strategy is one way many investors look to make money from stocks. Investors can take their dividend payments in cash or reinvest them into their stock holdings.

Not all companies pay dividends, and those that do tend to be large, established companies with predictable profits — blue-chip stocks, for example. If an investor owns a stock or fund that pays dividends, they can expect a regular payment from that company — typically, each quarter. Some companies may pay dividends more or less often.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Pros and Cons of Investing in Dividend Stocks

Since dividend income can help augment investing returns, investing in dividend stocks — or stocks that tend to pay higher than average dividends — is popular among some investors. But engaging in a strategy of purchasing dividend stocks has its pros and cons.

The most obvious advantage is that investors will receive dividend payments and may also see stock appreciation from their holdings. Another benefit is that investors can set up their dividends to automatically reinvest, meaning that their holdings grow with no extra effort.

Potential drawbacks, however, are that dividend stocks may generate a higher tax burden, depending on the specific stocks. You’ll need to look more closely at whether your dividends are “ordinary” or “qualified,” and dig a little deeper into qualified dividend tax rates to get a better idea of what you might end up owing.

Also, stocks that pay higher dividends often don’t see as much appreciation as some other growth stocks — but investors do reap the benefit of a steady, if small, payout.

What Is the Dividend Payout Ratio?

The dividend payout ratio expresses the percentage of net income that a company pays to shareholders as dividends. Ratios vary widely by company. Some may pay out all of their net income, while others may hang on to a portion to reinvest in the company or pay off debt.

Generally speaking, a healthy range for the dividend payout ratio is from 35% to 55%. There are certain circumstances in which a lower ratio might make sense for a company.

For example, a relatively young company that plans to expand might reinvest a larger portion of its profits into growth. A company’s dividend ratio might be lower or higher than that range. It’s important to consider dividend payouts in the greater context of the company itself.

How to Calculate a Dividend Payout

Calculating your potential dividend payout is fairly simple: It requires that you know the dividend payout ratio formula, and simply plug in some numbers.

Dividend Payout Ratio Formula

The simplest dividend payout ratio formula divides the total annual dividends by net income, or earnings, from the same period. The equation looks like this:

Dividend payout ratio = Dividends paid / Net income

Again, calculating the payout ratio is only a matter of doing some plug-and-play with the appropriate figures.

Dividend Payout Ratio Calculation Example

Here’s an example of how to calculate dividend payout using the dividend payout ratio.

• If a company reported net income of $120 million and paid out a total of $50 million in dividends, the dividend payout ratio would be $50 million/$120 million, or about 42%. That means that the company retained about 58% of its profits.

Or, to plug those numbers into the formula, it would look like this:

~42% = 50,000,000 / 120,000,000

• An alternative dividend payout ratio calculation uses dividends per share and earnings per share as variables:

Dividend payout ratio = Dividends per share / Earnings per share

A third formula uses retention ratio, which tells us how much of a company’s profits are being retained for reinvestment, rather than paid out in dividends.

Dividend payout ratio = 1 – Retention ratio

• You can determine the retention ratio with the following formula:

Retention ratio = (Net income – Dividends paid) / Net income

You can find figures including total dividends paid and a company’s net income in a company’s financial statements, such as its earnings report or annual report.

Why Does the Dividend Payout Ratio Matter?

Dividend stocks often play an important part in individuals’ investment strategies. As noted, dividends are one of the primary ways stock holdings earn money — investors also earn money on stocks by selling holdings that have appreciated in value.

Investors may choose to automatically reinvest the dividends they do earn, increasing the size of their holdings, and therefore, potentially earning even more dividends over time. This can often be done through a dividend reinvestment plan.

But it’s important to be able to know what the ratio results are telling you so that you can make wise decisions related to your investments.

Interpreting Dividend Payout Ratio Results

Learning how to calculate dividend payout and use the payout ratio is one thing. But what does it all mean?

On a basic level, the dividend payout ratio can help investors gain insight into the health of dividend stocks. For instance, a higher ratio indicates that a company is paying out more of its profits as dividends, and this may be a sign that it is established — or not necessarily looking to expand in the near future.

On the other hand, it could also indicate that a company isn’t investing enough in its own growth.

Lower ratios may mean a company is retaining a higher percentage of its earnings to expand its operations or fund research and development, for example. These stocks may still be a good bet, since these activities may help drive up share price or lead to large dividends in the future.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Dividend Sustainability

Paying attention to trends in dividend payout ratios can help you determine a dividend’s sustainability — or the likelihood a company will continue to pay dividends of a certain size in the future. For example, a steadily rising dividend payout ratio could indicate that a company is on a stable path, while a sudden jump to a higher payout ratio might be harder for a company to sustain.

That’s knowledge that may be put to use when trying to manage your portfolio.

It’s also worth noting that there can be dividend payout ratios that are more than 100%. That means the company is paying out more money in dividends than it is earning — something no company can do for very long. While they may ride out a bad year, they may also have to lower their dividends, or suspend them entirely, if this trend continues.

Dividend Payout Ratio vs Dividend Yield

The dividend yield is the ratio of a stock’s dividend per share to the stock’s current price:

Dividend yield = Annual dividend per share/Current stock price

As an example, if a stock costs $100 and pays an annual dividend of $7, the dividend yield will be $7/$100, or 7%.

Like the dividend payout ratio, dividend yield is a metric investors can use when comparing stocks to understand the health of a company. For example, high dividend yields might be a result of a quickly dropping share price, which may indicate that a stock is in trouble. Dividend yield can also help investors understand whether a stock is valued well and whether it will meet the investor’s income needs or fit with their overall investing strategy.

Dividend yield can also help investors understand whether a stock is valued well and whether it will meet the investor’s income needs or fit with their overall investing strategy.

Dividend Payout Ratio vs Retention Ratio

As discussed, the retention ratio tells investors how much of a company’s profits are being retained to be reinvested, rather than used to pay investors dividends. The formula looks like this:

Retention ratio = (Net income – Dividends paid) / Net income

If we use the same numbers from our initial example, the formula would look like this:

(120,000,000 – 50,000,000) / 120,000,000 = ~58%

This can be used much in the same way that the dividend payout ratio can, as it calculates the other side of the equation — how much a company is retaining, rather than paying out. In other words, if you can find one, you can easily find the other.

The Takeaway

The dividend payout ratio is a calculation that tells investors how much a company pays out in dividends to investors. Since dividend stocks can be an important component of an investment strategy, this can be useful information to investors who are trying to fine-tune their strategies, especially since different types of dividends have different tax implications.

In addition, the dividend payout ratio can help investors evaluate stocks that pay dividends, often providing clues about company health and long-term sustainability. It’s different from other ratios, like the retention ratio or the dividend yield.

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FAQ

How do you calculate your dividend payment?

To calculate your exact dividend payment, you’d need to know how many shares you own, a company’s net income, and the number of total outstanding shares. From there, you can calculate dividend per share, and multiply it by the number of shares you own.

Are dividends taxed?

Yes, dividends are taxed, as the IRS considers them a form of income. There may be some slight differences in how they’re taxed, but even if you reinvest your dividend income back into a company, you’ll still generate a tax liability by receiving dividend income.

What is a good dividend payout ratio?

Dividend payout ratios can range from 0% to 100% (or more, in some cases). A healthy range is generally considered to be between 35% to 55%. This can indicate a sustainable payout for a company, and provide confidence that cash flow is being distributed across priorities.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q225-015

May

2025

Tail Risk Explained: Woman investing on phone

Tail Risk, Fat Tails, and What They Mean for Investors

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Tail risk refers to the possibility that an investment could outperform or underperform its average return by a large amount. While many investors worry primarily about left-tail risk — the possibility of large losses — extreme gains can also wreak havoc with some types of strategies.

The term “tail risk” refers to the tails on a bell curve: While the fat middle of the bell curve represents the most probable returns, the tails — both positive and negative — represent the least likely outcomes.

Key Points

• Tail risk refers to the tails of a bell curve: i.e., the extremes of an asset’s price movements.

• Tail risk is measured by standard deviations: i.e., how far a price varies from the mean.

• Tail risk describes the risk that an investment will fall or rise by more than three standard deviations from its mean price.

• Some financial models are based on the idea of normal price distributions, but in reality, tail events impact market returns.

• While many investors are concerned about left-tail risk, which indicates the probability of losses, extreme gains could be problematic as well.

What Is Tail Risk?

Tail risk is defined by a concept called standard deviation. As a metric, standard deviation shows how widely the price of an asset fluctuates above and below its average. For a volatile stock, the standard deviation will be high, while the standard deviation for a stock with a steady value will be low — because the price doesn’t vary much from its mean.

Standard deviation is an important number that investors use to understand how historically volatile a stock is, as well as the level of volatility they can project for it in the future. That projection is based on the underlying assumption that the price changes of a stock will follow the pattern of what’s considered a normal distribution.

What is a normal distribution of returns?

Normal distribution is a statistical term used to describe the probability of an event, and it shapes the bell curve. If you flip a coin 10,000 times, how often will it land on heads or tails? Each time, there is a 50% probability it will land on heads or tails, and the curve describes the likelihood that those 10,000 flips will come out 50/50. The fat middle of the curve says it will be close to 50/50, but there are extremely low probabilities at the low (or skinny) ends of the bell curve that it could be more like 80/20 heads or 80/20 tails.

If you flip a coin 10,000 times, how often will it land on heads or tails? Each time, there is a 50% probability it will land on heads or tails, and the curve describes the likelihood that those 10,000 flips will come out 50/50. The fat middle of the curve says it will be close to 50/50, but there are extremely low probabilities at the extremes of the bell curve that it could be more like 80/20 heads vs. tails or tails vs. heads.

The normal distribution approach to probability predicts that a stock selling at a mean price of $45 with a $5 standard deviation is 95% certain to sell between $35 and $55 at the close of that day’s market.

“Tail risk” is used to describe the risk that an investment will fall or rise by more than three standard deviations from its mean price. To continue the example, the hypothetical stock $45 stock has entered the domain of tail risk if, at the end of the trading day, it is priced at $30 or below, or at $60 or above.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

What are Fat Tail Risks?

Unpredictable events can be predictable in some senses, in that they happen in the markets on a regular basis. And those markets, such as the one following the onset of the pandemic in early 2020, exhibit much “fatter” tails. Another period characterized by having an extremely fat tail was the 2008 Financial Crisis.

They’re called “fat tails” because the outcomes that had been on the extremes were suddenly happening, instead of the ones previously considered probable. This condition is also called by the mathematical term leptokurtosis. As a general rule, because they deviate so wildly from the expected norm, fat tail events present great risk as well as great opportunities for investors.

Tail Risk Strategy

Financial models such as Harry Markowitz’s modern portfolio theory (MPT) or the Black-Scholes Merton option pricing model, employ the assumption that the returns of a given asset will remain between the mean and three standard deviations.

The assumptions made in these long-term market projections can help with planning. But they’re not realistic regarding how investors receive their market returns over the long term. Rather, the bulk of their returns, no matter how diversified their portfolio, are largely the result of positive tail events. The power of tail events over long periods is one reason that experts tell investors to stay in the markets during fat-tail periods of volatility, even if it is stressful at the time.

Why Investors Hedge Tail Risks

Left-tail events also have the potential to have an extremely negative impact on portfolios. That’s why many investors hedge their portfolios against these events — aiming to improve long-term results by reducing risk. But these strategies necessarily come with short-term costs.

Downside Protection

One strategy that’s designed to protect against tail risks involves taking short positions that counterbalance the rest of a portfolio, also known as buying downside protection. For example, if an investor is heavily invested in U.S. equities, they may consider investing in derivatives on the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which correlates to the inverse of the S&P 500 index. (Using short strategies is also one way to invest during a bear market.)

Another way to hedge by buying downside protection is to purchase out-of-the-money put options. When the assets connected to these put options go down, the put options become more valuable. Granted, buying those options costs money, but it can be a strategy to consider for investors who believe the markets are likely to be volatile for a while.

Tail Risk Parity

Tail risk parity is a way to structure a portfolio based on the expectations that events that have a negative impact on one asset class will likely be a boon to others. This requires looking at each asset class in terms of how it might fare in the event of a particular crisis, and then finding an asset class that would likely do well in that same circumstance, and then keeping them in balance within your portfolio.

Managed Futures Funds

Other investors who want to trim their exposure to tail risks may invest in managed futures funds. These funds buy long and short futures contracts in equity indexes, and can thrive during times of crisis in the markets.

The Takeaway

A tail risk is the risk that an event with a low likelihood of happening could happen with any given asset. There are a few different ways to mitigate the impact of tail risk in an investment portfolio, but for long-term investors, it can be helpful to keep in mind that tail risk is responsible for most returns over time.

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FAQ

What is left-tail risk and right-tail risk?

Left- and right-tail risk refer to the likelihood of dramatic price changes at the extreme ends of the bell curve, both losses (left tail) and gains (right tail).

How do you limit tail risk?

While investment outcomes can’t be predicted, investors can seek to mitigate tail risk by investing in less volatile securities, and possibly hedging downside risk by taking short positions.

What is a tail event?

A tail event refers to a statistically unlikely outcome that can drive an asset’s price outside of its normal range.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q225-039

May

2025

Understanding the Stock Market Index

By Ashley Kilroy | Growing Wealth, invest, Investing | Comments Off

A stock market index measures the performance of a particular “basket” of stocks, representing a market segment based on factors such as market capitalization, industry, or region. Investors use these market indexes in many ways, such as to analyze current market conditions, identify industry trends, and invest in index funds.

To help you better understand how market indexes work and how investors use them to their advantage, here’s a deep dive into the inner workings of stock market indexes.

Key Points

• Stock market indexes track selected stocks, offering insights into market segments or the overall economy.

• Indexes use various weighting methods, including price, capitalization, value, and equal.

• Major market segments are represented by the S&P 500, NASDAQ Composite, and Dow Jones Industrial Average.

• Index funds provide investors with diversification and low barriers to entry.

• Index investing often involves simple management and may yield better long-term returns compared to active investing.

What is a Market Index?

A stock market index tracks a specific group of stocks in a market segment, like a specific industry or region. Indexes can tell investors and financial institutions a lot about specific investments, the sector as a whole, even the overall economy. Here are a few insights investors look to indexes for:

• To understand how the economy is performing

• To help with trend forecasting

• To create benchmarks to evaluate a particular investment’s profitability

Take, for example, the S&P 500, which tracks the 500 largest publicly-traded U.S. companies in the stock market. Each company is carefully selected to embody every primary industry, thus creating a replication of the market as a whole. Conceptually, an investor might look at the past performance of the S&P 500 to assess whether the stock market is emerging or receding.

How Stock Market Indexes Work

Indexes are made up of hundreds and sometimes thousands of stocks. However, the index doesn’t evenly assess each stock. Depending on what stocks have higher weight in an index, their performance may have more or less influence on how the index performs overall.

There are a few ways indexes are typically weighted:

• Price-weighted: In price-weighted indexes, the stocks with the higher price will have a greater influence on overall performance than those with lower prices.

• Capitalization-weighted: These indexes look at the total value (or market capitalization) of each stock’s outstanding share to determine its weighted value, giving smaller market caps a lower percentage weighting, and higher market caps a larger one.

• Value-weighted: A light math formula is employed in this type of index, where the price of the stock is multiplied by the number of outstanding shares.

• Equal-weighted: In this index type, all stocks are given equal weight, regardless of market cap, value, or price.

Types of Stock Market Indexes

While there are many indexes investors and financial professionals can follow, here are a few examples of stock market indexes.

• S&P 500: The S&P 500 measures the largest publicly-traded U.S. stocks. Financial professionals use the performance of the S&P 500 as a basis to compare other investment options.

• NASDAQ Composite Index: The NASDAQ Composite Index measures over 3,000 global and U.S. stocks registered on the NASDAQ stock market. Because it covers so many stocks, it is one of the most followed and quoted indexes. Some of the types of stocks include common stock and real estate trusts (REITs).

• Dow Jones Industrial Average: The Dow Jones Industrial Average, commonly known as the DJIA, measures 30 US-based blue-chip stocks that are often referred to as the foundation of the U.S. economy. These stocks usually include companies in market segments of the economy, with the exception of transportation and utilities (the Dow Jones has separate indexes for those two sectors).

• Russell 2000 Index: In contrast to the S&P 500, which follows large-cap stocks, the Russell 2000 follows 2000 of the smallest companies in the U.S. market (or small-cap stocks), making it a good benchmark for small, publicly-traded companies.

How to Invest in a Stock Market Index

Although it’s possible to purchase all stocks within a particular index, this method might be too time-consuming, complicated, and potentially expensive. Another option is to invest in ETFs or index funds that attempt to replicate indexes’ performance, known as an index fund. This investment strategy is often referred to as index investing.

With index investing, investors can effortlessly access index funds. By investing in index funds, they can also follow some common investing pillars, such as diversification. For example, investing in an index fund helps investors exercise a diversification strategy instead of a strategy centered around stock-picking and market timing.

Advantages of Investing in a Stock Market Index

As an investment strategy, index investing has certain benefits that may attract investors. These are the big ones.

Index Advantage: Simple Investment Management

By investing in a stock market index, investors may earn better returns with minimal effort, making index investing an easier way to manage their investments.

Investing in a stock market index is typically considered a passive investing strategy, where investors buy and hold securities to hopefully capitalize on long-term gains. Conversely, active investors buy and sell securities with the intent to beat the market or some form of index returns.

Because active investors are more hands-on, it’s easy to assume that they may reap higher returns than what the average index investor would see. But that’s not necessarily the case. In addition to most actively managed funds underperforming their passive investing counterparts, active investing requires a lot of time and analysis, and is often very challenging.

Index Advantage: Diversification

Diversification is considered by some to be one of the vital building blocks of a thorough investment strategy. With diversification, investors spread their investment across various assets instead of putting all of their money into a single security.

Since investments may perform differently in dissimilar economic environments, diversification may help investors minimize their risk exposure. In other words, if one investment drops in value, investors still have other investments to potentially make up for the loss.

Index Advantage: Minimal Barriers to Entry

For investors on a strict budget, it might be challenging to invest in more than just a few companies. However, by investing in a stock market index, they have exposure to a large assortment of stocks using the same amount of cash.

What’s more, investors don’t need the assistance of a money manager or financial advisor to invest in an index. That said, it’s still essential to review any related fees and costs. While indexes tend to have lower taxes and fees, it’s generally a good idea to review all costs involved in any investment before moving forward.

Disadvantages of Investing in Stock Market Indexes

Few things in life are perfect, and that includes investments. Here are some common disadvantages of investing in stock market indexes.

Index Disadvantage: Not a Short-Term Investment Strategy

Because indexes follow the market, their value increases incrementally, making them a better long-term investment strategy than short-term. Investors may also see fluctuations in returns, since they’ll go through various business cycles, which means that at times, investors may see very small, if any, increases to their portfolios.

Index Disadvantage: They Don’t Fully Follow a Certain Index

Stock market indexes may closely chart the index they track, but they may not perform exactly how the entire index performs. This is because indexes typically don’t include all of the stocks within a particular index; they only include a snapshot of the index as a whole. Thus, the index fund can’t wholly mimic the performance of the entire index.

However, while the index doesn’t directly mimic a stock market’s performance, it tends to have similar price fluctuations. So, if the market increases, typically the index will as well.

The Takeaway

The stock market index is a useful way for investors and analysts to get a sense of how a certain segment of the market is performing — whether that’s the top 500 publicly traded large-cap US companies, or the bottom 2000 small-cap ones. It’s also a way for investors to diversify their portfolios in one move, by investing in an index fund or ETF.

For investors who are interested, the government recommends reviewing all of the information available on a particular index, including the fund’s prospectus and most recent shareholder report. You may also want to identify the fees, your investment goals, and the investment risk of investing in a particular index.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

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For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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SOIN-Q225-004

May

2025

Pros & Cons of Quarterly vs Monthly Dividends

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

When investing in dividend-paying stocks, it’s important to consider whether it’s better to receive monthly dividends or quarterly dividend payments.

If you’re receiving dividend payouts from one or more stocks in your portfolio, you may not think there’s much difference in when you receive those payments. But investing in stocks that pay dividends monthly versus quarterly could yield some important benefits, so it’s wise to weigh the pros and cons.

Remember that not all stocks pay dividends, and dividends are not guaranteed over time; a company can choose to change or stop paying dividends at any time.

Quick Dividend Overview

A dividend is a percentage of a company’s profits that is paid out to shareholders, typically on a fixed schedule, i.e., monthly, quarterly, annually, etc. If a company issues a dividend outside of its regular payment schedule, this is referred to as a special or extra dividend.

If you’re not familiar with dividends or dividend-paying stocks, here’s a quick primer on how dividends work. Generally, dividends are a distribution of earnings to shareholders, as decided by the company board of directors. They are an indicator of profitability, but are not guaranteed.

Do All Stocks Pay Dividends?

No, not all stocks pay dividends. When looking at value vs growth stocks, an investor should bear in mind that growth stocks typically don’t offer a dividend payout to investors because the company reinvests all profits back into growth projects.

A value stock, on the other hand, may be in a better position to pay out dividends. Value stocks are companies that are undervalued by the market. These companies can pay out reliable dividends to investors and also offer capital appreciation if their stock price increases over time.

Companies that have an extended track record of paying dividends may be referred to as Dividend Aristocrats. These are S&P 500 companies that have consistently increased their dividend payout to investors over the previous 25 years or longer.

Why Do Companies Pay Dividends?

Public companies aren’t required to pay out dividends to their shareholders. But a company may choose to do so for any of the following reasons:

• As a reward to shareholders

• To attract new investors

• Because there’s no need to reinvest dividends in the company’s growth at a particular time

Dividend payments are one way to measure a company’s financial health. If a company consistently pays out dividends to shareholders, that can signal financial strength, which may be a draw to new investors.

Are Dividends Taxed?

Yes, most dividends are ordinary dividends, and are taxed as ordinary income. Some dividends are considered qualified when they meet certain IRS criteria; these are subject to the lower capital gains rate.

Monthly Dividends vs Quarterly Dividends: How They Work

If a company chooses to issue dividend payouts to its shareholders, it can determine the schedule for doing so. That can involve paying monthly dividends, or paying them quarterly instead.

Whether an investor has monthly dividend stocks or quarterly dividend stocks, there are different ways they can receive those payments. For example, the company might issue a check for the dividend amount at the appointed time.

Some companies may allow investors to use their dividends to purchase additional shares through a Dividend Reinvestment Plan (DRIP). With a DRIP, investors can use their dividend payouts to purchase full or fractional shares of the same company.

This might be preferable to receiving a check quarterly or monthly if an investor is looking to grow their portfolio, versus creating an income stream. Another advantage of using a DRIP with stocks that pay dividends monthly or quarterly is that an investor may be able to avoid commission fees by reinvesting.

Another advantage of using a DRIP with stocks that pay dividends monthly or quarterly is that an investor may be able to avoid commission fees by reinvesting.

Are Monthly Dividends Better Than Quarterly Dividends?

When deciding between monthly and quarterly dividends, here are some things to consider.

Monthly Dividend Payouts as Regular Income

First, consider the advantage of receiving regular income (assuming the dividends are not being reinvested through a DRIP). If a portfolio includes a number of monthly paying dividend stocks that have higher dividend yields, an investor could have a nice chunk of income coming their way each month, and possibly even live off that dividend income.

An investor could use that money to cover regular bills, grow their savings, pay down debt, or open an IRA or a college savings account, and invest for the future. Having that added income stream can make budgeting and planning for short- or long-term financial goals easier.

Those things could be more difficult to achieve with dividends that only arrive on a quarterly basis.

Reinvesting Monthly Dividend Payouts

Next, and perhaps more importantly, it may be possible to generate more income from monthly dividends by reinvesting them consistently into additional shares of stock. This ties into the concept of compounding interest and how it works.

Compound returns are essentially when investment gains earn returns, amplifying gains overall. Compounding can be a tool for growing wealth over the long term, but there are no guarantees, as investments are also subject to loss.

When dividends compound, however, the effect is similar to compound interest when investing in bonds or certain types of deposit accounts.The more time one has to invest and reinvest dividends, the more time one has to benefit from compounding’s effects.

In theory, investing in stocks that pay dividends monthly versus quarterly could work in an investor’s favor if they’re able to compound their money faster. So not only could they benefit from more regular dividend income payments, they could also potentially see more income from those stocks over time.

Whether this bears out in an investor’s portfolio depends largely on the dividend-paying stocks they own, of course. That’s why it’s important to understand how different stocks compare when investing for dividends to make sure you’re choosing ones that fit your personal investment goals.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

How to Create Monthly Income With Quarterly Dividends

It’s possible to reap the benefits of stocks that pay dividends monthly even if your portfolio only includes stocks that pay dividends quarterly. But this requires a little more work compared to choosing stocks that pay monthly dividends already.

The process involves choosing quarterly dividend stocks that can be staggered over 12 months. For example, an investor might choose three stocks that pay quarterly dividends:

• Stock A pays dividends in January, April, July, and October

• Stock B pays dividends in February, May, August, and November

• Stock C pays dividends in March, June, September, and December

By shaping a portfolio this way, an investor could get the benefit of monthly dividends without having to own stocks that pay dividends each month. But it’s important to consider what kind overall income one could generate when compounding interest is taken into account, versus choosing stocks that already pay monthly dividends.

The Takeaway

Investing in a mix of growth stocks and income stocks that generate dividends can help an investor build a well-rounded portfolio. For individuals who aren’t investing yet, getting started can make it easier to leverage the benefits of compounding over time.

When comparing dividend stocks, it helps to consider how frequently you’ll be able to receive those payments, as well as the amount of the dividend itself.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Is it better to get dividends monthly or quarterly?

It depends on your dividend strategy. Quarterly payouts may be easier to manage; monthly dividends may provide a more reliable income stream. Remember that dividends are not guaranteed, and not all stocks pay dividends.

Are Dividends Taxable?

Yes, all dividends are subject to tax. Most dividends are considered ordinary dividends and are taxed as income. Qualified dividends, which meet certain IRS criteria, are taxed at the more favorable capital gains rate.

Are Dividends Ever Guaranteed?

No. It’s true that some companies have a long history of paying dividends, and these “dividend aristocrats” may be more reliable. But any company can halt dividend payments at any time, as needed.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

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SOIN-Q225-064

May

2025

Numbers and stock quotes appear on a computer screen in multiple colors.

Pros & Cons of Buying Mid-Cap Stocks

By David Wolinsky | Growing Wealth, invest, Investing, Terminology | Comments Off

Mid-cap stocks are shares of publicly traded companies with market capitalizations of about $2 billion to $10 billion. The range also indicates where they fall in the spectrum of valuation between small-cap and big-cap (sometimes called large-cap) companies.

Because the stocks are approximations based on a company’s current value, their classification might change over time. There are also pros and cons to investing in mid-cap stocks, as there are when investing in stocks of all types and sizes.

Key Points

• Mid-cap stocks are from companies valued between $2 billion and $10 billion.

• Mid-cap companies may be less volatile compared to small-caps.

• Mid-cap stocks may outperform small- and large-cap stocks over time due to diverse valuations.

• Mid-cap stocks carry risks, including greater vulnerability to market downturns than large-cap stocks.

• Mid-caps can become large-caps over time.

Market Capitalization Investing

Market capitalization is a company’s total value: the number of outstanding shares a company has multiplied by the current price per share. For example, a company with 40 million shares selling at $100 a share would have a market cap of $4 billion.

When investing, the case can be made for including small-, mid-, and big-cap stocks in your portfolio. But when thinking about the numbers involved — small-cap companies have a value of less than $2 billion, and large-cap companies have a value of over $10 billion — understand that the values also govern potential growth.

In other words, small-cap stocks might grow into mid-cap stocks. But a large-cap stock can only stay a large-cap stock unless the value goes down. (Investors have informally come up with valuation categories for nano-cap stocks, micro-cap stocks, and mega-cap stocks, but there isn’t a broad consensus about their cutoff values.)

Either way, when investing, the hope is generally for stocks to increase in value or appreciate, and the prevailing wisdom is that small- and mid-cap stocks are appealing because they have room to grow.

Market Cap As a Basic Investor Tool

Knowing the market cap of a company can help investors compare the company to others of similar size. An investor choosing auto-manufacturing stocks could look at mid-cap companies in that particular market sector and compare how they are doing against one another.

To dig even deeper into the basics, it’s good to understand the difference between stocks and bonds. Bonds are a type of debt instrument, whereas stocks represent ownership in a company. Generally, stocks have the potential to offer the highest gains, while bonds are generally safer.

Investing In Mid-Cap Stocks

Finding an investment strategy that makes sense for you is largely about understanding the trade-offs involved. There’s really no such thing as a sure thing in investing, and probably the only way to think about the “best” mid-cap stocks is to look for ones that may offer a return on investment over time, and ideally a large one.

Beyond that, here’s a look at a couple of possible advantages and disadvantages of investing in mid-cap stocks.

Growth, Earnings, Capital

On the upside, whether mid-cap stocks are the sole investments being targeted for a portfolio or they’re part of a more diverse selection, a good argument for them is that they are often for companies that are trying to expand.

These are established companies in industries that are experiencing rapid growth, or are expected to. And thanks to that growth, the average mid-cap company’s earnings often grow at a steady clip.

Most mid-cap companies are small-caps that have burgeoned, and some are on their way to becoming large-cap businesses. Growth eases the ability to access financing to fuel expansion, so mid-caps typically have an easier time obtaining financing than small caps do.

Investing in mid-cap stocks can be the happy medium between small-cap growth and large-cap stability.

However, mid-cap stocks can be more vulnerable than large-cap ones. Being middle tier, by definition, means such companies don’t have as much capital to sustain them through market downturns as big-cap companies do.

And because they are also not massive companies like large-cap companies with a value over $10 billion, it also means they are not as diversified as bigger-cap companies. If the market for that company disappears, the company is also at risk.

Performance

On the pro side, because $2 billion to $10 billion is a sizable range of valuations, it means that mid-cap stocks often outperform large- and small-cap stocks just because it’s a markedly wide net of stocks. There are no guarantees that that will happen, of course, which is very important to keep in mind. And, naturally, historical performance is not necessarily an indicator of what will happen in the future.

On the other hand, investment risk is risk, and even those who don’t dabble in investing likely know that something that seems low risk isn’t the same as something that is not a risk. It doesn’t matter how many reports you read, there are always exceptions. It’s still a good idea to read up on different strategies and try to develop a sense of why some investments are riskier than others.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Researching Mid-Cap Stocks

Many mid-cap companies are household names, and you’d likely recognize a whole host of them. Even so, it’s best for anyone interested in investing in mid-cap stocks to do their homework: look at who’s running the company, who’s already invested, and what the stated goals in earnings and annual reports are.

And it might be smart to consult a financial professional if you need guidance.

It’s tempting to think of a “hot tip” as something you must rush to get in on, but it’s worth taking a breath and considering what you might be overlooking by fixating on something that seems lucrative but also requires urgent action. Again, do your homework.

The Takeaway

Market capitalization is a way for investors to understand the value of different companies and compare their performance and outlook, and mid-cap stocks, which can be seen as lying between small-cap growth and big-cap stability, are one investment strategy to consider.

But there are pros and cons to investing in mid-cap stocks, as there are when investing in other types of stocks. It’s always best to do as much research as you deem necessary before making decisions, and even consider consulting with a financial professional.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q225-011

How to Calculate a Dividend Payout Ratio

Understanding Dividends and How They Work

Pros and Cons of Investing in Dividend Stocks

What Is the Dividend Payout Ratio?

How to Calculate a Dividend Payout

Dividend Payout Ratio Formula

Dividend Payout Ratio Calculation Example

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Why Does the Dividend Payout Ratio Matter?

Interpreting Dividend Payout Ratio Results

Dividend Sustainability

Dividend Payout Ratio vs Dividend Yield

Dividend Payout Ratio vs Retention Ratio

The Takeaway

FAQ

How do you calculate your dividend payment?

Are dividends taxed?

What is a good dividend payout ratio?

Tail Risk, Fat Tails, and What They Mean for Investors

What Is Tail Risk?

What is a normal distribution of returns?

What are Fat Tail Risks?

Tail Risk Strategy

Why Investors Hedge Tail Risks

Downside Protection

Tail Risk Parity

Managed Futures Funds

The Takeaway

FAQ

What is left-tail risk and right-tail risk?

How do you limit tail risk?

What is a tail event?

Understanding the Stock Market Index

What is a Market Index?

How Stock Market Indexes Work

Types of Stock Market Indexes

How to Invest in a Stock Market Index

Advantages of Investing in a Stock Market Index

Index Advantage: Simple Investment Management

Index Advantage: Diversification

Index Advantage: Minimal Barriers to Entry

Disadvantages of Investing in Stock Market Indexes

Index Disadvantage: Not a Short-Term Investment Strategy

Index Disadvantage: They Don’t Fully Follow a Certain Index

The Takeaway

Pros & Cons of Quarterly vs Monthly Dividends

Quick Dividend Overview

Do All Stocks Pay Dividends?

Why Do Companies Pay Dividends?

Are Dividends Taxed?

Monthly Dividends vs Quarterly Dividends: How They Work

Are Monthly Dividends Better Than Quarterly Dividends?

Monthly Dividend Payouts as Regular Income

Reinvesting Monthly Dividend Payouts

How to Create Monthly Income With Quarterly Dividends

The Takeaway

FAQ

Is it better to get dividends monthly or quarterly?

Are Dividends Taxable?

Are Dividends Ever Guaranteed?

Pros & Cons of Buying Mid-Cap Stocks

Market Capitalization Investing

Market Cap As a Basic Investor Tool

Investing In Mid-Cap Stocks

Growth, Earnings, Capital

Performance

Researching Mid-Cap Stocks

The Takeaway

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