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A Primer on Dividends

A Primer on Dividends

September 09, 2023


Why Invest in Dividend-Paying Companies?


When looking for income-generating investments, Some investors turn to dividend-yielding stocks.

When a company makes a profit it can be put to two uses:

People Invest In Dividend Paying Companies For A Variety Of Different Reasons:

The following graph illustrates the performance of dividends and their contribution to the
S&P 500 since 1940. While the performance may vary, and past performance is not
indicative of future results, dividends have provided excess returns to shareholders for
almost 100 years.



How are Dividends Evaluated?

Investors track dividend-yielding stocks by examining a pair of ratios. 

Dividend per share measures how much cash an investor is scheduled to receive for
each share of dividend-yielding stock. It is calculated by adding up the total dividends
paid out over a year (not including special dividends) and dividing by the number of
shares of stock that are outstanding.

Dividend yield measures how much cash an investor is scheduled to receive for each
dollar invested in a dividend-yielding stock. It is calculated by dividing the dividends per
share by the share price.

Dividend Payout Rate  measures the amount of the company's earnings that will be
used to pay their dividends to shareholders. The ratio is calculated by dividing a
company's dividend paid by their net income. The dividend payout ratio is often helpful
in determining the sustainability of a company’s dividend.

Other Dividend Considerations

Investing in dividend-paying stocks can create a stream of taxable income. But the fact
that a company is paying dividends is only one factor to consider when choosing a stock investment.
Dividends can be stopped, increased, or decreased at any time. This is unlike interest
from a corporate bond, which is normally a set amount determined and approved by a
company's board of directors. If a company is experiencing financial difficulties, its
board may reduce or eliminate its dividend for a period of time. If a company is
outperforming expectations, it may boost its dividend or pay shareholders a special one-
time payout.

When considering a dividend-yielding stock, focus first on the company's cash position.
Companies with a strong cash position may be able to pay their scheduled dividend
without interruption. Many mature, profitable companies are in a position to offer regular
dividends to shareholders as a way to attract investors to the stock.
Qualified dividends are taxed at a maximum rate of 20%. Ordinary dividends are taxed
at the same rate as federal income taxes, or between 10% and 37%. State income
taxes also may apply. 

Be cautious when considering investments that pay a high dividend. While past history
cannot predict future performance, companies with established histories of consistent
dividend payment may be more likely to continue that performance in the future.
In a period of low interest rates, investors who want income may want to consider all
their options. Dividend-yielding stocks can generate taxable income, but like most
investments, they should be carefully reviewed before you commit any dollars.
Keep in mind that the return and principal value of stock prices will fluctuate as market
conditions change. And shares, when sold, may be worth more or less than their
original cost.


Dividends are a distribution of a company's earnings that are given to shareholders.
These distributions are often given out quarterly and can provide income as well as
capital appreciation to shareholders. While past performance is not indicative of future
results, dividend paying companies have often been able to provide excess returns
while mitigating risks for investors.