Investing in Dividend Stocks

Dividend stocks are a type of stock that pays out a set sum of money without having to sell the stock. Many people enjoy this type of stock as another way to provide themselves with income. In this article, we will go over the basics of investing in dividend stocks.

What is a Dividend and How Do You Receive Payment

A dividend is a payment made from a company to a stockholder. These payments are normally issued on a quarterly basis. They are generated from income the business makes. They are not required and can be paid out as cash or additional stocks. Because dividends come from income, they are usually issued by larger, more mature companies. The actual issuance of dividends is determined by a corporation’s board of directors. The dividend is expressed as a percentage share. Once a corporation determines the amount, they will also set the record and ex-dividend dates. The record date is the day a company compiles a list of current shareholders who will be eligible for the next dividend payout. The ex-dividend date is the cutoff for when an investor must purchase stock to receive the divided. This is usually one day before the record date.

Types of Dividends

There are two types of dividends, ordinary and qualified. The classification of your dividend will determine the way they are taxed by the IRS. Ordinary dividends are taxed at the same rate as your salary, tips, bonuses, commissions, and other types of ordinary income. Your dividend will qualify as ordinary income if you purchase your stock after the ex-dividend date.

On the other hand, a qualified dividend is taxed at capitals gains rates. This could be 0%, 15%, or 20%, based on your adjusted gross income. For a dividend to be considered qualified by the IRS you must purchase and hold the dividend stocks for longer than 60 days during the 121-day period beginning 60 days before the ex-dividend date. You do not need to figure out which type of dividends you have. You will receive a 1099-DIV from your financial institution. In box 1a your ordinary dividends will be reported and qualified dividends will appear in box 1b.

Pros and Cons

As with all investments, there are pros and cons to dividend stocks. The first benefit is that the offering companies need significant revenue to generate dividends. This typically means they are more established institutions that have more financial stability. The second benefit is that dividend stocks give you the ability to earn extra money without having to sell your shares.

Some cons include the fact that sometimes companies discontinue issuing dividends. Second, your stock is part of the ever-changing stock market and there is always the potential that you can lose value if the market takes a downturn.

Purchasing Dividend Stocks

If dividend stocks sound like something you would like to add to your portfolio, meet with your investment advisor. They can help you to find the best stock for your situation.

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