One important feature of owning some stock is the opportunity to receive a cash dividend. Stock dividends are payments from the company to each of its investors. Dividends are paid per share owned, which means buying additional shares entitles you to a larger dividend payment. However, owning more shares of a dividend stock doesn't necessarily equal a better investment.
Not all stocks pay dividends. Some companies prefer to reinvest the money that would otherwise go toward a dividend into operations or other parts of the business, such as paying down debt. Stocks that offer dividends, in any amount, are known as dividend stocks. A dividend stock does not have a fixed dividend rate, though recent payments per share are a good indicator of future dividend payment amounts.
Most companies pay dividends on a quarterly basis. This allows the company's board of directors to examine earnings reports before deciding on the dividend amount. If performance was better than expected and there is more total money to go around, the board of directors may increase the dividend per share. Likewise, poor performance may result in reducing the dividend per share or eliminating it altogether. When a company announces a dividend, investment analysts may refer to it by its per share value or its total value in millions or billions of dollars.
Per-share dividend payments figure prominently in some investment strategies. Buying more shares of a lower-priced stock with a reasonably high dividend rate history will likely provide more dividend income than buying fewer shares of a better-performing stock with a lower dividend. However, other investors, especially those with long-term investment and income goals, may forgo higher dividends in favor of stock with the highest growth potential or the ability to rise in value rapidly. Dividends can also help reduce the risk associated with a stock, since dividend income will counteract any losses in value during the time you own the stock.
The only cases in which dividends are not paid on a per share basis is when they are not paid in cash at all. This is the case when a company offers a stock dividend, which is a payment in the form of additional stock to each of its shareholders. It also holds true for investors who have their dividends automatically reinvested through dividend reinvestment plans to buy partial shares of the same company without ever receiving cash payments. However, the amount that is reinvested is still based on the number of shares the investor owns and the dividend per share.
Video of the Day
- dollars image by peter Hires Images from Fotolia.com