The term 'Dividend' is included in the Investments edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Choose your edition here...
Dividends represent portions of a company’s earnings that are returned to the investors in the company’s stock. These are typically paid out in cash that is either deposited into the investors’ brokerage accounts or can be reinvested directly into the company’s stock. As an example of a dividend, every share of Phillip Morris pays around 4.5% dividends on the stock price each year.
Investing in dividend paying stocks is a particular passive income investment strategy that is also a cash flow investment. This passive, or cash flow, income means that you collect income just from holding these stock investments. This kind of strategy entails building up a group of blue chip company stocks that pay large dividend yields which add money to your account usually four times per year, on a quarterly basis. Investors in dividends tremendously enjoy watching these routine deposits in cash arrive in either their bank account, brokerage account, or the mail.
Dividend investors who understand this type of investment are looking for a number of different elements in the stocks that they buy. Such dividend stocks should include a high dividend yield. To qualify as high yields, most value investors prefer to see ones that pay more than do the interest rate yields on U.S. Treasuries. Dividend yields can be easily determined. All that you have to do is to take the amount of the dividend and divide it by the price of the stock. So a stock that offers a $2 dividend and costs $40 is paying a five percent dividend yield.
Dividend paying stocks should also feature high dividend coverage. This coverage simply refers to the safety of a dividend, or how likely it is to be reduced or even eliminated. Companies that earn their profits from a large array of businesses are more likely to be able to continue paying their dividends than are companies that make all of their money off of a single business that could be threatened.
A more tangible way of expressing the coverage lies in how many times the dividend total dollar amount is covered by the corporation’s total earnings. A company with fifty million dollars in profits that pays twenty million in dividends has its dividend covered by two and a half times. Should their profits drop by ten percent or more, they will have no trouble still paying the same dividend amount to shareholders. The dividend payout ratio is another way of measuring this. On the above example it would be forty percent. Dividend investors prefer to see no more than sixty percent of profits given out as dividends, as this could signify that the company lacks future opportunities for growth and expansion.
Qualified dividends are a third element that dividend investors are looking for in their dividend paying stocks. This simply means that stocks that are kept for less than a year do not benefit from lower tax rates on dividends. Since the government is attempting to convince you to become a longer term investor, you should take advantage of these lower tax rates by only buying stocks with qualified dividends that you have held for a full year and more.