I recently opened an etrade account because I wanted to earn a larger return on my savings. After reading a bunch of investing guides I still don’t completely understand dividends. When choosing a stock or how do I find out how often and how much I should expect to receive in dividends? Do all stock pay dividends to their investors?

 

  • Michael L 7:51 pm on October 7, 2009

    Dividends are returns of earnings paid to the shareholders (owners of the company), and must be declared each time they are paid by the companies Board of Directors. For this discussion I will only cover common stock dividends and not preferred stock dividends.

    Dividends can be paid in cash or in stock. A stock that pays a dividend of $1.00 per share will usually pay $0.25 per quarter (or 4 times a year). If the price of the stock is $10 then the stock is said to have a dividend yield of 10%, which is really good. If the stock price is $20, then the Div Yield is 5%. Dividends and yields can be found in any stock listing, on line or in print. Don’t expect to find one of those 10% yield stocks though, everyone will want that one and the demand for shares will drive up the price lowering the yield. Sounds complicated but it really isn’t.

    A stock dividend is not paid in cash but in stock. If a company decides to pay a stock dividend of 5% you will recieve 5 shares for every 100 shares that you own. Companies with not a lot of cash available, but who want to reward their shareholders will pay stock dividends.

    Do not confuse a stock dividend with a stock split where a company may give you 1 share for every share that you own. The value of the shares in that case will be divided in half and the value of your investment will not change (disregarding market movement).

    Do all companies pay a dividend? No. Remember a company has to be making a profit (usually) to pay a dividend to the owners. Also the board of directors might deem the money more useful to reinvest in the company for research and development than to pay out as a dividend.

    As a rule of thumb if you are looking for companies that pay cash dividends look to established companies where their stock price is relatively stable. Utility companies are a good bet for cash dividends.

    Stocks that do not pay dividends are not bad stocks, but they usually offer the shareholder a chance of greater price appreciation rather than a dividend yield. Technology based companies are some of these.

    I hope this sheads some light on your question.

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