Role of Dividends in the Stock Market
Updated: Aug 9, 2020
In a stock portfolio, you may notice that some companies will give what is called a dividend. A dividend is a payment made to an investor who owns shares of stock in a company. Dividends are payments in cash or in more shares of stock by companies to investors. Therefore on top of the appreciation that you can make from a stock’s performance, you get paid dividends. As a result, many investors buy stocks that offer dividends.
Dividends vary for each company but are usually paid on a quarterly or yearly basis. In the stock market, a quarter is a three month period that is used to reveal quarterly earnings and allow for payment of dividends. There are four quarters in each year, and companies strive to have strong earnings each quarter to raise the stock’s price and value. Dividends can change throughout the quarter, depending on whether the stock price increases or decreases.
Three essential terms to know are the ex-dividend date, the payment date, and a yield. The ex-dividend date is the date you need to be invested in the stock before to be eligible for a dividend. The payment date is when the company will pay you your dividend in cash or in additional shares of stock. A yield measures the amount of money you can make through dividends and are shown as percentages. You would like a higher yield percentage in your stocks because it means you will get paid more.
The workings of a dividend are very simple. For example, let’s say you own 10 shares of AT&T. The price of AT&T’s stock is currently $30.02, the dividend yield is 6.97% annually. That means you receive $2.08 for every share you own or $20.08 in total. That $20.08 is an additional profit on top of what you make if the stock price increases from when you bought it. (This example doesn’t account for price or dividend change).
Dividends are an important aspect of the stock market and in different types of investing. Long-term investors use dividends to gradually grow their portfolio’s assets, whether in cash or more shares of stock. Also, dividends provide more safety to the investors because it can help lower total losses if the stock price decreases from the price purchased at. Many investors can benefit from these stocks through the protection of reducing total losses and increasing profits on a stock. Dividends are offered in many different stocks in many different sectors of the stock market, allowing an investor, looking for a dividend, more options and diversification. Stocks that provide dividends can be crucial to your portfolio's longevity while enhancing your profits and limiting total deficits.