The definition of a dividend is payments made by a corporation or organization such as a mutual life insurance company to its shareholder members. It is the portion of corporate profits paid out to stockholders for their investment in the company. Dividends are taxable payments to shareholders as a share of a company’s earnings. These payments can come from profits generated by the company and on rare occasions a corporation may borrow funds at a very low rate to make a dividend payment (Microsoft 2010)
Dividends are authorized by the company’s board of directors and can be paid annually but are generally paid on a quarterly basis. Often times the board of directors will change the amount of dividend based on economic conditions and reasons.
The dividend itself is quoted based on a dollar amount per share (dividends per share), such as $2.00 per share. This dividend is in addition to the actual value of the stock itself, and companies paying dividend can normally value their stock higher because of the income from a dividend.
Companies may denote a date the dividend will be paid and those owning stock on the cutoff day will also receive the dividend. Many investors use this date to determine when to buy and when to sell a specific stock.
Companies with a long term history of stability can make excellent choices for those needing stable and dependable income streams at retirement. While dividends are not guaranteed and chances can happen, those companies with a long term history of paying dividends is normally a safe choice.
Taxes on dividends have changed over the years, from a high of 35% before 2003 to a rate of 15% currently. Income tax rates should be a consideration when choosing a dividend paying company because the actual net amount after taxes is the basis for owning the dividend paying stock.
Today’s current tax rate (15%) makes dividend paying stocks very attractive for most retirees.
Dividends are not guaranteed and if your funds need to be ina safe and completely secure investment, dividend paying stocks may not be a good choice for you.
Like all important decisions, always consult a licensed professional regarding tax and legal issues.