Generating Profits from Dividend Stocks

One of the great advantages of long term investments is making money through dividend-paying stocks. However, only a few mature companies pay regular dividends to their shareholders. Most companies prefer to reinvest their profits on developments to further expand their business. Nevertheless, investing in companies that pay dividends is a really good way to generate passive money, especially if held for a long time. In this article, we would talk about making money from dividend stocks.

Trade12 - What are Dividend Stocks

What are dividend stocks?

Dividend stocks are a type of stock that issues a dividend or a payout to its holders to give some return of investment. A dividend is a payment made by the company to its shareholders. It is usually done when the company earns a profit or surplus. There are also some companies that regularly give dividends, most often done quarterly.

Read about reinvesting through dividend reinvestment plan.

A dividend is allocated as a fixed amount per share, while shareholders receive varying amounts of money depending on the volume of shares they own. These dividends usually come with tax. Meaning, even if the company issues a certain amount to be paid, the shareholders still have the responsibility to pay the tax equivalent to the amount they’ll receive. This should take place regardless of what they want to do to the dividend they receive.

Trade12 - Types of Dividends

Types of dividends

  • Cash dividend

This is the most common type of dividend. It is usually paid out via electronic funds transfer or through printed checks. The amount is usually based on a certain fixed percentage of profit that is distributed on each stock owned. This type of dividend is usually taxable to the recipient within the year they are paid. Cash dividends are paid out when a company either has positive earnings or it has already generated enough profits to afford paying dividends.

  • Stock dividend

This type of dividend distributes extra stocks based on how many shares the shareholders already own. A stock dividend that does not result to any change in dividend earnings is called a stock split. A stock split happens when the total number of shares increases. Thus lowering the price of each share, without changing the total value of the shares held.

  • Property dividend

A company may issue a non-monetary dividend to its shareholders rather than giving out cash or stocks as payment. However, this type of dividend is relatively rare. This dividend is paid out in the form of assets. Although it can also take on other forms such as products and services.

  • Scrip dividend

If the company cannot afford to pay regular cash dividends or have insufficient funds to do so, they usually opt to issue scrip dividends. A scrip dividend is a promissory note that promises to pay the shareholders at a later date. It may or may not include an accumulating interest.

Conclusion

Dividend payouts from companies are not always guaranteed. It still depends on the overall performance of the company and if it can afford to distribute some of its profits to its shareholders. However, once you are able to purchase dividend stocks, it is better to hold on it for a long time to let it accumulate to more significant amount over time. This is a one of the best ways to save money if you prefer passive investments rather than buying and selling stocks every once in a while. Another good idea is to use the money you’ve earned from dividends to reinvest and expand your assets.

Read more about how the stock market operates.

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4 thoughts on “Generating Profits from Dividend Stocks

  1. Thanks for the info! Ive been looking for an extensive explanation of how to earn money from dividends and this covered it pretty well. People had been telling me to invest early so i could further enjoy my retirement. Will keep this in mind thanks

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