You might have heard about dividend stocks if you’re learning about investing or have already been investing for a while. But do you know what dividends are, and how they impact your investment portfolio? Here’s what you need to know about dividends.
What Is a Stock Dividend?
A dividend is a way for companies to pass on part of their profits to shareholders. When a company makes money, they can use it to buy other companies or launch new lines of business, they can buy back shares of their own stock, or they can pay dividends to shareholders.
There are three basic types of dividends:
- Cash dividends: Payments made to the shareholders of record, who can choose to take the money or use it to buy more shares of stock (called “reinvestment”); usually paid each quarter, based on the company’s earnings the previous quarter
- Stock dividends: Entail distributing additional shares of stock to shareholders
- Extraordinary dividends: One-time dividends based on specific circumstance
What Is Dividend Yield?
Dividend yield is a measure of the value of a dividend stock compared to others. It represents the relationship between the price of the stock and the dividend it pays. It’s a good way to compare two dividend stocks to decide which to purchase.
To figure out the dividend yield of a stock, you will need to know the annual dividend and the current stock price. Divide the current stock price by the annual dividend to get the dividend yield. So, if you have a stock that is trading at $100 per share and it pays an annual dividend of $2, it would have a dividend yield of 2 percent. If the stock price were to drop to $80 per share, the dividend yield would also drop, in this case to 1.6 percent.
Some stocks are considered high dividend stocks because they have higher-than-average dividend yields. The best dividend stocks are those that pay dividends consistently and raise their dividend over time.
Up Next: 10 Best Dividend Stocks of All Time