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Dividend - What Are Dividends – and What Are Dividend Taxed At?

Updated on March 27, 2011

What Are Dividends On Stocks?

When you buy a company’s shares, you expect that company to make a profit. The profit that company makes is then divided among the shareholders on a ratio proportional to the number of stocks one has. Dividend on stocks is therefore the proportion of a company's profit that it pays to its shareholders. This is usually declared as a dividend per share. In US, dividends on stocks are usually paid quarterly whilst in UK dividends are normally paid in two parts namely the interim dividend payments and final dividend payments which are paid once the final profit results are known.

The Ultimate Dividend Playbook: Income, Insight and Independence for Today's Investor
The Ultimate Dividend Playbook: Income, Insight and Independence for Today's Investor

What Are Dividends In Arrears?

Divided in areas are unpaid dividends on preferred stocks to be paid to the shareholder at a future date.  A preferred stock, which is also called a preferred share, is a stock that receives preferential treatment over the common stock. The preference is in terms of dividend payments and claims of assets. When a company goes under, holders of preferred stocks are given a higher priority in claiming the assets of the company. Unfortunately, preferred shareholders do not have the voting rights in corporate elections.

How Are Dividend Paid?

When you buy a stock, its price can go up or it can go down. This does not mean the company will not pay you dividends. If the company makes a profit, it may pay you dividends. Some companies which are growth-oriented may make a lot of profit but may prefer to re-invest the profits back in to the company instead of paying shareholders their dividends. If you are a shareholder, you may benefit in the sense that the stock which you own may go up in prices. It’s important to remember that common stocks cannot be paid dividends until the preferred stocks have been paid their agreed dividend. If the company is not doing well the preferred stocks can hold a little until the company starts making some money. If you have been in stock market for long, perhaps you may agree that preferred stocks seem not to be a bad thing to own. For a company to pay dividends, first it must satisfy its financial obligations of paying creditors, and then dividends to the preferred stocks and finally dividends to the common stocks. A company will usually issue a check as payment for dividends to each shareholder. The company may as well pay divided by issuing more shares to shareholders which are issued in proportions to how many shares each shareholder have.

What Are Dividends Taxed At?

Dividends are of two types namely:  ordinary dividends and qualified dividends.  Ordinary dividends are taxed at the same rates you are taxed for in your normal personal income tax.  On the other hand, qualified dividends will receive special tax treatments and are therefore taxed at the same rates as capital gains.

Dividend Fund

To define dividend fund, it’s good first to understand what mutual funds are. Mutual funds are actually pools of money that are placed in the care of an investment company to manage. There are different investment charters for mutual funds. There are those funds that are geared to generate income on a regular basis. There are those funds that are meant to preserve an investor’s money whilst other funds are geared to invest in stocks of companies that are growing at fast speeds. Dividend fund is a fund that is first and foremost invested in preferred shares of a company. The investment in dividend fund can extend to investment in common stock but only after a substantial portion of it is already invested in preferred stocks. Dividend fund is usually invested in companies with appreciating share prices.

Dividend Yield

Dividend yield is the percentage or ratio for the year that shows how much a company dividend is relative to share price. If the stock has had no capital gain, then the dividend yield is the return an investment in a stock will return. In case of preferred stock, it is easier to calculate dividend yield before the investment is done as the dividend is known. In case of common stocks where there is no stipulated dividend for common stock, dividend yield is estimated using the current dividend which is based on the performance of last year. To give an example, take company X which paid a total of $2 per share last year as dividend. If the company X stock is currently trading at $25 per share, the dividend yield is 2/25 X 100 = 8%

What Are Dividend Paying Stocks?

Dividend paying stocks are shares of a company that pays regular dividend payments to its shareholders. These are good companies to invest in because even if the stock price was to go down, you still get a worthwhile return in your investment from dividends. If you look at a company and find that for the last 30 years it has always paid dividends every year, then chances are high for that company to pay dividend for the next year. A good example is a company like Coca Cola.

The Single Best Investment: Creating Wealth with Dividend Growth
The Single Best Investment: Creating Wealth with Dividend Growth

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    • Hello, hello, profile image

      Hello, hello, 7 years ago from London, UK

      Very interesting and informative hub, thank you.