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How Stock Dividends Work

How Stock Dividends Work

Dividends provide an intrinsic motivation for investors to become shareholders of a company. This article is a short introduction to how they work to create an extra source of income.
Omkar Phatak
People who live secure retired lives are the ones who made wise investments in their heydays. One of the high risk and high return investments that one could opt for is a stock. There are various types of stocks that you could opt for; varying in price range and other details. There are those which pay dividends and those which do not.

What are Stocks?

A stock represents a quantum of ownership in a company. So when you buy a stock, you become a partial owner of the company, as you get a slice of its equity. A company goes public and sells a part of its equity holding to raise cash for the company.

The sold stocks can be traded on the stock exchange later. Their value changes according to the performance of that company. You can profit from a stock, by buying it cheap and selling it at a higher price. However, this is not the only way in which you can profit from the stock market. There are stocks that pay dividends, which can be a regular source of income for the shareholders.

About Dividends

The idea behind the introduction of dividends is that shareholders, being partial owners of a company, should get a share of the profits that a company makes. So they are quanta of profits made by the company, which are paid to the shareholder. A company stock may or may not pay dividends. It is totally up to the management.

The amount of dividends paid are directly proportional to the number of stocks that you own in a company. They are paid per share. To be eligible for dividends, you need to register your stocks with the company. The dividend payout ratio for a stock provides you with an idea of the amount of dividends, which you can receive for any stock. More the ratio, better is the payout.

How Do They Work for Investors?

The amount of dividends paid by a company are decided by the management board and a company announces it. They may be paid every three months (quarterly), every six months, or every year.

Since stocks keep getting sold and owners keep changing, companies decide on a record date, at which the dividend is paid to the person who is the current owner. As a rule, you must have bought a stock, at least three days before the record date to be eligible for dividends that come as a part of it. Then there is the distribution date, that you need to note, when the dividends are paid. They are either paid in check or cash and deposited to your bank account. Some companies may provide you with more stocks, instead of providing cash. Not surprisingly, stocks that pay dividends are the most sought after ones, as they constitute a regular source of income.