Dividend stocks are securities that include a regular distribution of the issuing company’s earnings. They operate like ordinary stocks and represent a share of ownership in a company. The stock price may move up or down. As long as the shareholder owns a stock, they receive a dividend for each share.
What is a dividend?
A dividend is a payment from a company (or other entity) to shareholders tied to stock ownership. Most dividend-paying companies pay their shareholders quarterly, though the exact timing of the dividend is up to the company’s board of directors. The board also decides the size of the dividend and can change the figure depending on the company’s earnings each quarter. Once the board picks a suitable figure, the dividend yield is presented as a percentage of the stock’s price.
Companies that pay dividends tend to be stable, profit-earning companies looking to make their stock a more attractive investment. Not all profitable companies choose to pay a dividend, though. Some companies reinvest profits into the business or boost employee compensation.
Many prominent investors—like Warren Buffett—love investing in companies that pay dividends because they provide multiple sources of income. As with any stock, an investor can earn a profit by selling a dividend-paying stock after the price has risen. Combined with quarterly dividends, this can create an attractive return on investment.
How do they work?
Dividend payments follow a strict series of events to determine who is eligible to receive compensation.
The first step is for the company’s management to announce a dividend payment. The shareholders must then agree to the dividend payment.
The next step is the ex-dividend date or the day dividend eligibility expires. Investors must purchase the stock before the ex-dividend date. If a stock’s ex-dividend date is, for example, October 15, any purchases on or after the 15th are ineligible to receive compensation. Anyone who owns the shares before that date is eligible.
The record date is typically the day after the ex-dividend date and is marked by the issuing company recording (hence the name) the owners of all dividend-paying stocks.
Finally, the payment date is the day the company pays its dividend, typically via payments directly to the stockholder’s brokerage account.
10-year Compounding Effect of Dividends on Total Stock Returns
YCharts
How are dividends taxed?
Dividend income is taxable, but the exact tax percentage depends on whether the dividend is qualified or non-qualified.
Qualified dividends are taxed at the long-term capital gains tax rate, which is lower than the tax rate on regular income. To earn qualified dividend status, the dividend must be disbursed by an American corporation or a corporation subject to U.S. taxes and easily accessible on U.S. stock exchanges. Also, the dividend is only qualified if the investor has held the stock for at least 60 days during the 121 days beginning 60 days before the ex-dividend date. For preferred stock, the investor must have held the stock for at least 90 days during the 181 days starting 90 days before the ex-dividend date.
The long-term capital gains tax rate for qualified dividends is either 0%, 15% or 20%, depending on the investor’s income. Those earning less than $79,999 per year pay 0%. Those earning between $80,000 and $441,449 pay 15%. Anyone earning more than $441,500 annually pays 20% tax on qualifying dividends.
Unqualified dividends are taxed at the short-term capital gains tax rate, which is the same as the tax rate on regular income. The current rates range from 10% to 37%, depending on the investor’s income level.
Examples of Dividend Stocks
Companies that pay dividends tend to be mature, stable companies that are turning a regular net profit. They also tend to be companies that don’t need to dedicate a considerable portion of earnings to innovating. Thus, many dividend-paying companies are from sectors like oil & gas, banks & financials, healthcare & pharmaceuticals or other mature sectors.
The following are currently among the highest dividend-paying stocks:
- Lumen Technologies (LUMN): 11.3% Forward Dividend Yield
- Altria Group
MO
- Verizon Communications
VZ
- Walgreens Boots Alliance (WBA): 5.6% Forward Dividend Yield
- Prudential Financial
PRU
Hundreds of other companies in the S&P 500 pay dividends to shareholders. Other dividend-paying securities include real estate investment trusts (REITs), master limited partnerships (MLPs), as well as some mutual funds, and exchange-traded funds (ETFs).
What are “Dividend Aristocrats”?
Dividend aristocrats are companies—typically those in the S&P 500—that have increased their dividends for the last 25 years. The current list, which includes 64 companies, comprises many of the healthiest companies in the U.S. These companies consistently generate a profit, allowing the board of directors to approve a higher dividend each year. Companies on the list include IBM
IBM
PEP
The list is regularly updated yearly to remove companies that cut their dividends, ensuring that only the most stable companies earn a spot on the list of dividend aristocrats.
Five Market-Beating Dividend Stocks to Whip Inflation
Many investors may not realize that since 1930 dividends have provided 40% of the stock markets total returns. And what is less known is its outsized impact is even more acute during inflationary years like the one we’re having now, a whopping 54% of shareholder gains.
If you’re looking to add high quality dividend stocks to hedge against inflation, Forbes’ investment team has found 5 companies with strong fundamentals to keep growing when prices are surging.