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What Are Dividends? A New Investor’s Guide

February 27, 2019

2 min read

What are dividends? There’s a lot to know about this key investment term. Here are some simple answers to some commonly asked questions.

What are dividends?

A dividend is a distribution of a company’s earnings, a divvying up.

Say Coca-Cola makes a profit. And say you own shares of Coca-Cola. If those shares pay dividends (not all do), you get a certain amount of the profit the company distributes to its shareholders. That amount is determined by how many shares you have.

This is called ‘pro-rata’ in finance-speak, which just means proportional. Your share of the dividends is in proportion to how many shares you own.

Dividends are almost always paid out in cash payments (occasionally additional shares of stock are issued, but it’s usually cash). And these payments usually occur four times a year (at the end of every quarter).

What is dividend reinvestment?

Dividend reinvestment is pretty much what it sounds like. You get a dividend payment, and rather than taking the cash and spending it, you reinvest those dividends back into your investments.

Another reason re-investing your dividends may be wiser than just cashing them out?

Cash dividend payments tend to be affected more by inflation, whereas stock values can often increase at rates above inflation over time—though that’s not necessarily guaranteed.

Dividend reinvestment can be a great way to keep adding to your investments and keep your money working for you.

How are dividends taxed?

Something to note. Your stock dividends are not taxed until the investor liquidates their shares.

This is why people may choose to re-invest their dividends rather than cash out. By keeping their dividends in the market, they can avoid paying taxes on that money.

How do I know if my investments pay dividends?

One way to find out if a stock pays dividends is to go to a free research site such as Yahoo Finance and enter the ticker (the series of letters that represent a company being traded on an exchange).

If it does, it will list the most recent dividend date and amount.

When you invest on Stash, you can find information about dividends for every single stock and fund we offer.

What is dividend yield?

This is a ratio that shows cash dividends relative to a stock’s price (translation: what you can expect to get based on what you put in and how a stock is trading). This is expressed as a percentage.

Your share of the dividends is in proportion to how many shares you own. Let’s check out what this looks like in dollars and percentages.

The relationship looks like this:

Yields are usually estimated based on the previous year’s dividend payments, and payment schedules are set in advance, making them somewhat predictable. However, the dividend yield of a stock is directly affected by the price of a company’s stock, so there’s no crystal ball.

No one can predict the future, but the historical price and dividend data can help us better understand yields.

Stash your dividends

Dividends are just one reason that investing your money for a long-term goal may be a wiser idea than just leaving it in your checking account.

It can be a great way to keep your money working for you.

[get-stash]

By Stash Team

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