What Happens to Dividends in a Stock Portfolio?
Dividend investing is a common strategy because it produces a relatively reliable stream of income for investors without some of the volatility that stocks generally deliver. Indeed, while investors were withdrawing money out of the stock market in 2012 amid high volatility, they committed some $22 billion to dividend funds, according to a 2012 CNN Money article. There are no absolutes with dividends, though, as these distributions present both dividend issuers and investors with choices. What happens to dividends in a stock portfolio is largely up to the companies making the payments and the investors receiving them.
Shares of dividend stocks purchased by investors through stock brokers are not registered under each individual investor's name. Instead, shares are held in what is known as a "street name," which is an account that is registered to the brokerage firm or to some other entity. When a company issues dividends, those payments are then credited to each individual investor. The brokerage firm then proceeds to send statements to investors that reflect the dividend credits. Investors must wait to receive dividend distributions according to the brokerage firm's payment schedule.
If an investor chooses to participate in a dividend reinvestment program, commonly called a DRIP, he will not receive cash payments. Instead, the dividend earnings will automatically be reinvested in the company's stock, which increases the investor's holding in the company and bypasses brokerage fees associated with purchasing additional shares of stock. Investors have the option to participate in DRIPs via the hundreds of dividend-paying companies that offer these programs directly, or via a wealth manager or financial advisor.
When companies decide to issue cash dividends, investors can literally expect to receive a check in the mail. Each company has its own distribution schedule, but dividends can be paid on a monthly or quarterly basis, or possibly once or twice each year. A company may also decide to issue stock dividends. Stock dividends are characterized as large or small based on the size of the distribution relative to the number of shares outstanding, or available for trading. Stock dividends present investors with additional shares of stock, which increases their overall ownership in the company, for no charge.
Stock market investors have to pay taxes on the money they earn from returns, but dividends are treated differently than other stocks. Investors in non-dividend-paying stocks must only pay tax on the profits they earn from the investments in the year in which they sell them. Dividend investors must pay taxes annually on the income they earn from dividend payments. In 2012, for example, cash dividends were taxed at a rate of 15 percent, but that rate remained subject to change based on public policy.
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.