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When interest rates reach historic lows, some investors in search of income-generating investments turn to dividend-yielding stocks.
Dividends are taxable payments made by a company to its shareholders. When a company makes a profit, that money can be put to two uses - it can be reinvested in the business or it can be paid out to the company’s shareholders in the form of a dividend. Some dividends are paid quarterly and others are paid monthly.
Investors track dividend-yielding stocks by examining a pair of ratios.
Dividend per share measures how much cash an investor is scheduled to receive for each share of dividend-yielding stock. It is calculated by adding up the total dividends paid out over a year (not including special dividends) and dividing by the number of shares of stock that are outstanding.
Dividend yield measures how much cash an investor is scheduled to receive for each dollar invested in a dividend-yielding stock. It is calculated by dividing the dividends per share by the share price.
Investing in dividend-paying stocks can create a stream of taxable income. But the fact that a company is paying dividends is only one factor to consider when choosing a stock investment.
Dividends can be stopped, increased or decreased at any time, unlike interest from a corporate bond, which is normally a set amount determined and approved by a company’s board of directors. If a company is experiencing financial difficulties, its board may reduce or eliminate its dividend for a period of time. If a company is outperforming expectations, it may boost its dividend or pay shareholders a special one-time payout.
When considering a dividend-yielding stock, focus first on the company’s cash position. Companies with a strong cash position may be able to pay their scheduled dividend without interruption. Many mature, profitable companies are in a position to offer regular dividends to shareholders as a way to attract investors to the stock.
Dividend income is currently taxed at a maximum rate of 20%.
Be cautious when considering investments that pay a high dividend. While past history cannot predict future performance, companies with established histories of consistent dividend payment may be more likely to continue that performance in the future.
In a period of low interest rates, investors who want income may want to consider all their options. Dividend-yielding stocks can generate taxable income but, like most investments, they should be carefully reviewed before you commit any dollars.
Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
The information in this article is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
This chart shows the role dividends have played in stock market performance during the past 50 years ended December 31, 2012. Past performance does not guarantee future results.
Thomson Reuters, 2013. The S&P 500 Composite Index and S&P 500 Composite Index (Total Return) are unmanaged indices that are generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2013 FMG Suite.
This article is for information and educational purposes only and does not necessarily represent the opinion of Protective Life. Protective Life did not assist in the preparation of this material. Neither Protective nor its representatives offer legal or tax advice. For information about Protective Life and its products and services, visit www.protective.com.
Protective and Protective Life refer to Protective Life Insurance Company (PLICO) and its affiliates, including Protective Life & Annuity Insurance Company (PLAICO). Variable annuities are issued by PLICO in all states except New York and, in New York, by PLAICO. Securities issued by Investment Distributors, Inc. (IDI), principal underwriter for registered products issued by PLICO and PLAICO, its affiliates. All companies located in Birmingham, AL. Each company is solely responsible for the financial obligations accruing under the products it issues. Product guarantees are backed by the financial strength and claims-paying ability of the issuing company. FMG Suite is not an affiliate of PLICO and is responsible for its own financial conditions and obligations.
There are four important dates for dividends:
Declaration Date: The company announces when it will pay a dividend and how much the dividend will be worth.
Ex-Dividend Date: Shareholders of record before this date are entitled to receive the next dividend payment.
Record Date: On this date, the list of stockholders is finalized.
Payable Date: On this date, the taxable dividend is paid to shareholders.