What’s dividend stock?

When a stock company is profitable, it can elect to pass resources on to its shareholders by paying dividends. This action must be approved by the shareholders, and in most jurisdictions each individual share in the company must receive the same amount of dividend payment. A dividend is usually cash, but can be anything, e.g. commodities or financial instruments.

dividendsIn many jurisdictions, dividends are treated more favorably than other forms of capital gains when it comes to taxation. This is one of the reasons why many investors like to purchase stock in companies with a history of making large dividend payments. The special tax treatment afforded dividend payments in many parts of the world can be especially important for a person that is striving to stay within a certain tax bracket.

Generally speaking, the companies known to pay the highest dividends are mature companies. A newly formed company is more likely to use any profits to expand rather than distribute these resources to the shareholders.

Some fields of commerce are known to have a larger degree of high-dividend companies that others. Examples of such high-dividend fields are oil and natural gas, real estate, banking and financial services, basic materials, health care, and utilities.

Fixed schedule dividend vs special dividends

Many companies have a fixed schedule for dividend payments (e.g. once a year), and they can also strive to create fairly uniform dividend payments from year to year instead of letting the size of the dividend swing depending on early company earnings.

The opposite of a dividend that is paid according to a fixed schedule is the special dividend; a one-time payment to the shareholders. The reasons why a company makes a special dividend payment varies. The shareholders can for instance decide to approve a special dividend payment when the company has achieved unusually high earnings one year and is not believed to be able to stay on that profit level. Substantial changes to a company’s financial structure is another thing that can prompt a special dividend payment.

Dividend reinvestment program

If you enter into a dividend reinvestment program (DRIP) your cash dividends will be automatically used to purchase company stock for you.