Some companies make regular payments, called dividends, to investors who own shares of its stock. For investors, this may be considered an advantage of investing in a company.
Not all companies pay dividends, so if steady dividend income—and maybe even the possibility of living off dividend income—is the goal, an investor would need to look specifically for dividend-paying investments.
Dividends are typically paid quarterly, though there are cases where they are paid more or less frequently. But there’s more to it than simply investing in a stock and waiting for one’s dividend to roll in. Here’s a deeper look at how dividends work.
A Quick Dividend Overview
Companies will sometimes share a portion of their profits with shareholders, and this is called a dividend. Dividends are typically distributed as cash, although it’s also possible to receive a dividend in the form of stock.
Typically, dividends work on a per-share basis. For example, if Company A pays a cash dividend of 50 cents per share, and an investor owned 50 shares, they would receive $25 in cash.
If a company pays a stock dividend, it’s usually a percentage increase in the number of shares an investor owns. So if Company A awards a 5% stock dividend and an investor owns 100 shares of Company A, they would have 105 shares after the dividend payout.
How Often Are Dividends Paid Out?
In most cases in the U.S., dividends are paid quarterly, or four times a year, on the same schedule as they must report earnings (quarterly). Logically, it makes sense that dividends would come only after a company has finalized its income statement and its board of directors has reviewed (and approved) the numbers.
Some investments pay dividends on other schedules, such as twice a year, once a year, or monthly, or on no schedule at all (called “irregular” dividends), but this isn’t typical in the United States. Ultimately, the dividend payout schedule is up to a company’s board of directors.
It’s also possible for a company to pay a special one-time dividend. Usually a special dividend is paid out when a company has had a stronger-than-usual earnings period or has excess cash on hand—from the sale of a business, perhaps, or the liquidation of an investment, or a major litigation win. These special one-time dividends may be paid as cash, stock, or property dividends.
When it comes to mutual funds that invest in dividend-paying companies, they may pay dividends on a more frequent basis, such as monthly or even weekly.
When Are Dividends Paid?
Although frequency of dividends may vary, there are four essential dates involved in the payment of dividends:
1. Declaration date: This is the day that a company’s board of directors states their intention to pay a dividend.
2. Date of record: This is the date on which a company will review its records to establish who its shareholders are. In order to receive a dividend, an investor must be a “holder of record,” which means they owned shares on or before the ex-dividend date.
3. Ex-dividend date: This is the date by which an investor must have purchased shares of a stock in order to receive an upcoming dividend. If an investor bought shares of Company A on or after the ex-dividend date, the dividend would go to the investor from whom they purchased the shares—they themselves would not receive a dividend.
4. Payment date: This is the date a dividend is paid to company shareholders.
Here’s an example of how these dates work:
General Electric (NASDAQ: GE) declared a dividend of $0.01 per share on September 3, 2020. The payment date for the dividend was October 26, to shareholders of record on September 28, which makes the ex-dividend date September 25 (because September 28 was a Monday). In other words, in order to receive the dividend being paid on October 26, you’d have to have purchased or owned GE shares before September 25. (GE was chosen as an example only; this is not a recommendation to buy, sell, or hold GE.)
Typically, investors can get information about a company’s dividend dates by visiting its investor relations page. To find this, search for the company’s name and “investor relations” online. Or check a company’s dividend history online. Many investment websites, including Nasdaq.com, track this information.
Why Wait for Quarterly Dividend Payouts?
SoFi’s TGIF ETF Pays Every Friday.
How Are Dividends Paid Out?
Companies typically send cash dividends directly to an investor’s brokerage, where the money is deposited into their account. The company might also mail a check to stockholders.
In other cases, investors will be paid in company stocks. Some companies and mutual funds offer the option of a dividend reinvestment plan (DRIP) that will automatically buy additional shares for an investor with their dividends. This offers the advantages of both simplifying the process (since investors won’t have to receive the cash and buy more shares themselves) and potentially being more cost effective, since many DRIP programs don’t charge commissions.
Additionally, some DRIP programs discount the purchase of additional shares. For this and other reasons, some investors may specifically look to find dividend reinvestment stocks.
More rarely, a company might award a property dividend instead of cash or stock payouts. This could include company products, shares of a subsidiary company, or physical assets the company owns.
What Is a Dividend Yield?
Calculating the dividend yield of an investment is useful for investors who want to compare companies and the dividends they pay. A dividend yield is essentially a measurement of the cash flow an investor will get back for each dollar they invest in a company. For investors looking for investments to help supplement their cash flow, a higher dividend yield on a stock would be more attractive than a lower one.
Historically, high dividend yields tend to come from companies in the following fields: banks and financial, healthcare and pharmaceuticals, basic materials, oil and gas, utilities, and REITs. But it’s important to remember that high yields can also come from any company whose stock price is falling—in those cases, it’s a sign of trouble.
To calculate dividend yield, divide the total dollar value of dividends paid per share in a year by the dollar value of one share of stock. For example, if a company paid out $3 in dividends per share and its stock currently costs $100, the dividend yield would be 3%.
There are generally two ways to find a company’s dividend payout:
• Most recent dividend payout: If a company pays a quarterly dividend, multiply the most recent payment by four to get an annual dividend amount.
• Annual report: A company’s annual report typically contains the annual dividend per share.
Investors can also check online for the dividend yield. For instance, the NASDAQ’s dividend history page on individual stocks also lists a company’s dividend yield.
Dividend amounts tend to be consistent from quarter to quarter, though they may vary slightly from payment to payment. Special one-time dividends may be of varying amounts, however, and typically aren’t included in dividend yield calculations.
Are Dividends Taxable?
Dividend income is always taxable, but tax treatment will depend on how long an investor has held the investment and what kind of account they’re holding it in.
For instance, if an investor is holding the investment in a retirement account such as a 401(k) or IRA, the dividend isn’t taxable at the time of distribution. (Though depending on the account, the income may be taxed upon withdrawal during retirement.)
If the investment is held in a taxable account then a dividend is considered income, and the tax rate will depend on whether it’s a qualified dividend or nonqualified (ordinary) dividend.
Tax Rate for Qualified Dividends
These are dividends paid by a U.S. corporation or a qualified foreign corporation on stock that an investor has held for a certain period of time—generally more than 60 days during the 121-day period that starts 60 days before the ex-dividend date.
For some preferred stock, the investor must have held it for 91 days out of the 181-day period starting 90 days before the ex-dividend date. Taxes on qualified dividends are paid at long-term capital gains rates, which range from 0% to 20% based on an individual’s modified adjusted gross income.
In other words, the taxes investors pay on qualified dividends are based on their overall income tax bracket, and they could pay 0%, depending on their income. Because the long-term capital gains tax rate is lower than ordinary income tax rate, qualified dividends are preferable to nonqualified dividends.
Tax Rates for Long-Term Capital Gains
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Tax Rate for Nonqualified Dividends
The more common type of dividend is a nonqualified—or ordinary—dividend. When companies pay ordinary dividends, they’re considered ordinary income, so an investor will be taxed at ordinary income tax rates.
In general, investors should assume that any dividend they receive is an ordinary dividend unless told otherwise. (The payer of the dividend is required to identify the type of dividend when they report them on Form 1099-DIV at tax time.)
Can You Live on Dividends?
In general, retirees should plan to live off a combination of Social Security, interest income from bonds, and selling a small portion of their investments each year. The 4% retirement rule maintains that if one withdraws no more than 4% of their portfolio each year, they’ll be able to make their nest egg last—although some financial professionals believe this formula is too conservative.
Investments that pay regular dividends may shift an individual’s retirement equation by providing steady income over time that may allow them to sell fewer investments—or no investments at all. The amount of dividends a stock pays often grows over time as companies get larger and continue to increase their profits.
Investing with an eye toward dividend income may allow an investor to create an income stream that could successfully supplement their Social Security and other income in retirement.
Dividends—cash or stock rewards from a company to its shareholders—are typically paid quarterly to qualifying shareholders. These financial “bonuses” can be attractive to investors, who may seek out dividend-paying companies specifically in hopes of boosting their bottom line. Some investors look specifically for investments that pay dividends as a way to generate income and savings for retirement.
Dividends may provide a source of consistent and predictable income, which may be a helpful addition to an individual’s portfolio, depending on their investing goals. Investors may choose to use dividend income to supplement other income or to reinvest in their portfolio.
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