MY EBOOK! http://www.ryanoscribner.com/stock-trading Here is everything you have ever wanted to know about dividends and dividend stocks. In fact, it is probably more than you ever wanted to know! I am about to drop some serious knowledge. Companies that are well established and have good stability may offer a dividend to shareholders. These companies are generally financially secure and as a result the stock may not move much. A dividend is meant to entice the investor and give them a reason to stick around as a shareholder. Many investors use dividends as a way to build long term wealth. The Basics (Terminology) “Dividend” – Distribution of a portion of a company’s earnings. “Cash Dividend” – Cash payment to stockholders paid on a per share basis. This can be a % of the share price or a set dollar amount per share. “Date of Record” – The cutoff date the company uses to determine who is eligible for the dividend. “Declaration Date” – The date a company announces an upcoming dividend. “Dividend Coverage Ratio” – Ratio of a company’s earnings and net dividend paid to shareholders. Dividend Coverage Ratio = (Earnings Per Share/Dividend Per Share) “Dividend Reinvestment Plan” – A plan that allows you to automatically reinvest cash dividends by purchasing additional shares on the dividend payment date. “Dividend Yield” – How much a company pays out in dividends each year relative to share price. Dividend Yield = (Annual Dividend Per Share/Current Stock Price) “One Time Dividend” – Special dividend paid in addition to regular cash dividends. “Stock Dividend” – Dividend paid in the form of additional shares. Companies that earn a profit have a few options of what to do for shareholders. They can reinvest the earnings through expansion, reduction of debt or repurchasing of shares issued. They can pay a portion of the earnings to shareholders in the form of a dividend. Or they can do a combination of these two. Dividends are paid on a quarterly or yearly basis. Not all companies offer dividends. It is generally the well-established and stable companies that offer them. Also, no dividend is guaranteed. A company can increase, decrease or eliminate future dividends based on business performance. It is important to note that high dividends do not always mean a stable investment. High dividends can be a sign of low future growth expected or the company facing overall financial difficulty. In contrast, low dividends can be a good sign for the company. It can be an expectation of future growth. Investors like to take advantage of the regular cash payments and steady income available from dividend stocks. Companies that pay rising dividends over time are generally stable and financially healthy companies. The stock price of these companies is generally more stable and less volatile. Investors close to retirement or young investors looking for long term growth often invest in dividend stocks. Reinvestment of dividends allows you to take advantage of compounding. This results in the earning of more dividends from your initial dividends. Compounding can result in substantial growth over a long period of time. Factors of Compounding: 1. Initial Investment 2. Earnings (Dividend, Interest) 3. Reinvestment of Earnings 4. Time Remember, high dividends are not always a sign of a good stock. Dividend yields increase as share prices fall. High dividend yield could be a sign of a lagging stock price. Over the last 60 years, the average S&P 500 dividend is 2 to 5%. Dividend coverage is an indicator of whether the company can afford to pay the dividend or if they are holding back profits from investors. This is calculated by determining the dividend coverage ratio. Dividend Coverage Ratio = (Earnings Per Share/Dividend Per Share) A dividend coverage ratio of 2 to 3 is adequate dividend coverage. This means the company can afford this dividend. A dividend coverage ratio below 2 means the company can’t afford the dividend and a dividend cut may be on the horizon. A dividend coverage ratio above 5 means the company may be holding back and could likely have paid the investors more. Companies that offer consistent dividends with rising dividend payments over time are generally good companies to invest in. These are signs of stability, good management and good financial health. Taxes: There are three dividend categories on the 1099-DIV. “Ordinary Dividend” - Taxed as ordinary income (up to 35%). “Qualified Dividend” - Capital gains tax applies as well (up to 15%). “Non-dividend Distribution” - A distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. Significant dividends may result in payments of estimated taxes throughout the year in order to avoid interest or penalties from the IRS. Website http://www.ryanoscribner.com Follow me on Twitter! https://twitter.com/RyanOScribner Personal Fitness Coaching http://www.ryanoscribner.com/shop
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