Aug 25, 2017

Are you also interested in stocks, but have no idea regarding how dividends pay off in stocks? Here is all you need to know about paying dividend stocks.

What Is A Dividend?

A dividend is a particular sum of money that is paid regularly, by any company to its shareholders. This money comes from the company’s stock of profits or reserves.

How Do Dividends Work?

Basically, for every single share of a stock which is owned by you—you get paid a small portion of that company’s earnings.  To cut the long process short, you are simply being paid because you own that stock.

Many companies pay annual dividends of 20 cents on each share. However, several others also pay dividends at every quarter, four times a year.

What Are Stock Dividends?

Stock dividends are proportionate distributions that are made by a company’s additional stocks or shares. These are paid to the owners of a common stock. In simpler words, you get to receive extra shares of stock when your company announces a stock dividend, in difference of a cash dividend.

Companies opt for stock dividends for a number of reasons. Some of them include insufficient cash at hand or a need to lower prices of stocks on a single-share basis. This could increase trading and can also create an increase in liquidity.

Why stock dividends hold an upper hand on cash dividends?

Unlike a cash dividend, a stock dividend is essentially an increase in the number of shares a company owns. This takes place when new shares are handed to shareholders.

This happens when a company gives, for suppose, a 5% stock dividend. It increases the number of shares by 5%. That is roughly one share for every 20 shares that are owned. However, this doesn’t increase the value of a company. If the company is priced at $10 per share and they own 1 million shares, their value would be around $10 million.  After a stock dividend, the value remains the same but share prices decrease to $9.52, for adjusting the dividend payout.

Stock dividends are thought of holding a greater advantage to cash dividends—provided they are not accompanied with the option of cash. This does not necessarily mean that a shareholder needs to only invest in stock dividends. They can still reinvest the profits from a cash dividend back into the company, using dividend reinvestment plans.

The key to gaining wealth from stock dividends is to have a high buildup of your portfolio. When you have thousands of shares investments, use these dividends to buy additional stock in the company. This will ultimately allow you to earn a lot of money over the course of years. The key practice is to keep on reinvesting the dividends. 

To wrap things up, a stock dividend is a way through which companies reward their shareholders for owning stocks. Instead of cash rewards, these payments are made by supplying additional shares of stocks.

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