What Are Stock Dividends?

When I was a stock broker one of the more common questions I addressed had to do with publicly traded stocks that had a dividend attached to them. A dividend is a form of some type of payment that is made by the company issuing the stock to the shareholders of record. This is done at the discretion of the board members of the company and not all publicly traded stocks will have dividends.

The reason is that a dividend is typically paid out when a company has a surplus of money at the end of the year which represents their profit. Most companies that make money have what is known as retained earnings and this money is put back into the company in order to help it grow. But a company that has a surplus can decide to keep most of that surplus as retained earnings and still set some about aside for the payment of dividends. If a company is not making money then it is not often that the company will offer a dividend.

Most companies will have a fixed schedule for payments of their dividends and this is more times than not conducted on a quarterly basis (every three months). Some companies will however give their dividend on a bi-annual basis (two times per year), an annual basis (once per year), or even a monthly basis. Companies can also issue what are known as "special dividends" and these are paid out at a random date usually because the company has a windfall of unexpected earnings and wishes to pass some of that good will on to its shareholders.

Most of the time dividends are paid in the form of cash and the amount received will depend on the amount of shares that a shareholder owns. For example, if a dividend is $1.00 per share and it is paid quarterly, then a shareholder with 100 shares of the stock will receive a payment of $6.25 every three months ($0.25 per share) which will equal $25.00 at year's end. However, some dividends can be made in the form of additional stock or other form of property though these methods are not as common as the cash method.

The most important thing to know about stock dividends is that they can be cut or taken away at any time if so voted by the board members. A good indication that a company may be considering the cut or drop of its dividend is if the company has a quarter or two of bad earnings. A dividend cut may then take place in order to allow the company to keep more of the surplus as retained earnings. Before you jump into any investment that involves dividends you should talk to your financial advisor and see if the company is the right choice for you.