The Benefits of Stock Dividends

In its simplest form, a dividend is money that a corporation pays you quarterly when you own its stock.

For example, Kimberly-Clark (KMB) pays shareholders $2.80 per share, per year.  Therefore, the quarterly dividend is $0.70 per share. KMB’s share price is $67.03. The dividend yield is 4.18% based on the current share price. ($2.80 divided by $67.03 = 4.18%)

What do you immediately notice about that 4.18%? You’re mentally comparing that to what the bank pays you on your checking account, savings account, or CDs. If you’re a little more educated in investments, you might be comparing that to bond yields.  And if you’re not entirely risk averse, you might be saying to yourself, “Why should I take less than 1% at the bank with no prospects of growing my principal, when I can buy Kimberly-Clark stock, earn 4% from the dividend, and possibly have the stock price go up as well?”

Exactly.  People buy stocks for the prospects of growing their principal through capital gains.  People buy dividend-paying stocks for the prospects of growing their principal through capital gains AND income.

A third way that an investor might make money in stocks is that many corporations which pay stock dividends increase their dividend occasionally or annually! A quick look at a corporation’s dividend history will show you whether that company has a history of increasing its dividend on a regular basis. Look at the corporation’s website or at a Standard & Poor’s stock research report.

And there’s a side benefit to dividend-paying stocks: they generally have less risk, meaning that their share prices generally don’t drop quickly like they might on other stocks.  Why not?  Because when the stock market is declining, and investors are panicking and selling their stocks, they pause and consider keeping the ones that are paying them 3%, 4%, 5% and 6% annual income.  The fewer people who are panicking and selling Kimberly-Clark, the less likely that the stock price will drop like other stocks in the market which don’t pay dividends.

“What else do I need to know about dividends?” Well, some stocks only pay their dividends once or twice per year, like DeVry Inc. Also, pay attention to the ex-dividend date. In order to earn the next dividend, you need to own the stock by the ex-dividend date. For example, Kimberly-Clark’s (KMB) next ex-dividend date is June 8, 2011. A person would need to purchase the shares by June 7, 2011 in order to earn that dividend.  Companies generally pay their dividend a few weeks after the ex-dividend date. But even short-term traders can earn dividends. A person who buys KMB shares on June 7, 2011, and then sells them a week later, will still receive the dividend, even though they no longer own the stock, because they owned the stock on the ex-dividend date!

If your stocks are in a brokerage account, the dividend is deposited into that account, and will likely earn interest in a money market fund until you make your next investment decision. (If you have a margin debit, the dividend will serve to reduce the debit.)  You can easily arrange for your brokerage account to mail the dividends to you, or you might be able to write checks off your investment account. See disclaimer below.

Dividends are taxable to you as income, the same as interest on a bank account, unless, of course, you own the dividend-paying stock in a tax-free or tax-deferred account, like an IRA. Dividends are also taxable even if you reinvest them to buy more shares (as in a DRIP account or a mutual fund). See disclaimer below, and consult with your tax adviser on how stock capital gains and income are taxed.

Happy investing!

Crista Huff

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