Investing in dividend-paying stocks is a great way to build long-term wealth. Below, you’ll find introductory information about dividend stocks. In later sections, we will cover more advanced topics, such as dividend yield and dividend reinvestment programs.
Essentially, for every share of a dividend stock that you own, you are paid a portion of the company’s earnings.
You get paid simply for owning the stock (which is a slice of the ownership of the company you paid for).
For example, let’s say Company X pays an annualized dividend of 20 cents per share.
Most companies pay dividends quarterly (four times a year), meaning at the end of every business quarter, the company will send a check for 1/4 of 20 cents (or 5 cents) for each share you own.
This may not seem like a lot, but when you have built your portfolio up to thousands (if not tens/hundreds of thousands) of shares, and use those dividends to buy more stock in the company, you can make a lot of money over the years.
The key is to reinvest those dividends, especially when you have time to reinvest - when you are retired/retiring, you may use/live off those dividend streams that you had accumulated over the years.
These means "the usual dividends" - regular cash dividends are those paid out of a company’s profits to the owners of the business (i.e., the shareholders).
A company that has preferred stock issued must make the dividend payment on those shares before a single penny can be paid out to the common/normal stockholders.
Special One-Time Dividends
In addition to regular dividends, sometimes a company may pay a special one-time dividend (basically means it's special, and once-off ie non-recurring).
These are rare and can occur for a variety of reasons such as a major litigation win, the sale of a business or liquidation of a investment.
They can be in the form of cash, stock or property dividends.
Dividends must be declared (i.e., approved) by a company’s Board of Directors each time they are paid.
There are four important dates to remember regarding dividends.
Dividends are paid either:
For U.S./Singapore stocks in particular, there are no “set in stone” rules dictating the frequency of dividend payouts.
That is to say, corporations have the freedom to set their own payout policies regarding both the size and timing of their distributions.
With that being said, there is a tradition that most regular corporations will pay out a dividend to their shareholders on a quarterly basis, which aligns with the legal requirement to report earnings on a quarterly basis.
Ultimately, the decision of how of often dividends will be paid out is left to a company’s board of directors.
In many countries outside of the United States, corporations will
often times pay out a distribution on either an annual (once a year) or
semi-annual (twice a year) basis; as mentioned previously, there are
also a number of U.S. stocks that don’t follow the quarterly tradition,
instead they too will make annual or semi-annual distributions to their
shareholders (quite a few of the dividend stocks that I invest in Singapore pay dividends 2x per year ie every 6 months)
There are other instances when securities will not stick to a quarterly dividend payout plan.
More often than not, companies that are legally structured with the intent to generate a consistent distribution of income to shareholders will pay out dividends on a monthly basis; specifically, this includes many, but not all, real estate investment trusts (REITs) as well as master-limited partnerships.
These companies may be appealing to investors who require a more frequent stream of income.
A stock dividend is a proportionate distribution of additional shares of a company’s stock to owners of the common stock.
In other words, you will receive additional shares of stock when a company declares a stock dividend, in contrast to a cash dividend.
A company may opt for stock dividends for a number of reasons including inadequate cash on hand or a desire to lower the price of the stock on a per-share basis to prompt more trading and increase liquidity.
The term “stock split” can also apply to stock dividends.