A dividend is the distribution of a company's earnings to its shareholders and is determined by the company's board of directors. Dividends are often distributed quarterly and may be paid out as cash or in the form of reinvestment in additional stock.
The dividend yield is the dividend per share and is expressed as dividend/price as a percentage of a company's share price, such as 2.5%.
Common shareholders of dividend-paying companies are eligible to receive a distribution as long as they own the stock before the ex-dividend date.
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Why Is 'Dividend' the Term of the Day?
A key advantage of dividend-paying stocks is that they can provide investors with income even when markets are under pressure, as most dividend-paying companies continue to pay dividends regardless of whether the broader market is up or down.
Dividend-paying companies tend to be large, established firms with predictable profits in industries such as basic materials, oil and gas, banking, healthcare, and utilities. While these may not generate as much excitement as stocks with higher growth potential, they tend to be less volatile when markets are rocky. Reinvesting dividends can also help grow your investments faster.
However, dividends are not without their downsides. When a company pays a dividend, the stock price goes down because the company’s overall wealth has shrunk. Most dividends are also taxed, although they’re taxed less than some other kinds of income, such as bond interest. Qualified dividends may be particularly tax-advantaged, depending on your tax bracket. Qualified dividends can be taxed as a capital gain, rather than ordinary income, which means the tax rate tops out at 20%.