What are dividends and how do they work? (2024)

Even if you're new to investing you've probably heard about dividends. These are payments publicly traded companies may make to shareholders and can take the form of cash or additional shares, known as stock dividends.

There are several reasons investors look to dividend stocks: Most pay out quarterly, which can provide relatively reliable income. Companies that pay dividends are typically seen as more stable and financially sound and, historically, dividend stocks have provided a buffer during market downturns.

Below, CNBC Select explains how dividends are paid out, how to judge their value and more.

What we'll cover

  • What is a dividend?
  • How are dividends paid?
  • How to invest in dividend stocks
  • Are dividends taxed?
  • Bottom line

What is a dividend?

A dividend is a portion of a company's earnings that is paid to a shareholder. The most common type of dividend is a cash payout, but some companies will issue stock dividends.

Dividends are typically issued quarterly but can also be disbursed monthly or annually. Distributions are announced in advance and determined by the company's board of directors.

Companies pay dividends for a variety of reasons, most often to show their financial stability and to keep or attract investors.

Not all stocks pay dividends — in fact, most do not.Some major companies, including Amazon and Alphabet, have never issued dividends.

Companies that do pay dividends tend to be larger and more established, with steady growth rather than sudden spikes. S&P 500 companies that have a long history of paying increased dividends are called Dividend Aristocrats.

How dividends are paid

Dividends are typically paid according to how many shares you have. If you own 100 shares of a company that is trading at $1 a share and paying a dividend of 25%, you would be paid $25.

Cash dividends are paid out either as a check sent to the investor or as a credit to a brokerage account, which can then be reinvested.

Stock dividends are paid in fractional shares. If a company issues a stock dividend of 5%, shareholders will receive 0.05 shares in dividends for every share they already own.

There are several important days to keep in mind when it comes to dividends.

  • The declaration date is when a company announces that a dividend will be paid.
  • The ex-dividend date (or "ex-date") is the deadline to purchase a stock and still be eligible to receive the dividend. It is set according to stock exchange regulations.
  • The record date is the date by which investors must be on the company's books in order to receive a dividend. Officially set by the board of directors, it's usually one day after the ex-dividend date. Any trades made on this date are not eligible for dividends until the next distribution.
  • The payment date is when dividends are paid to shareholders.
  • The settlement date is the day a trade is finalized and a shareholder officially owns the stock if they purchased shares or they receive payment if they sold shares. It's typically two days after a buy order is made.

There are different ways to measure dividends and their value to investors.

  • The dividend rate represents how much of a stock's share price shareholders receive in dividends. If a stock is trading at $100 a share and pays a dividend of $5 each quarter (or $20 a year), the dividend rate is 20%.
  • A dividend payout ratio, meanwhile, indicates what percentage of a company's earnings is being paid out in dividends. If a company has earnings of $100,000 and pays total dividends of $20,000, it would have a dividend payout rate of 20%.
  • A dividend yield is one of the ways investors determine if a stock is profitable. To find it, divide the stock's annual dividend by its current share price.So, if a stock is trading at $100 and its annual dividend per share is $5, the dividend yield is 5%.

How to invest in dividend stocks

Investment options for dividend stocks are as varied as they are for any other stock — you can choose shares of an individual company, mutual funds or ETFs.

The easiest way to buy dividend stocks is by opening a brokerage account. Ally Invest®'s self-directed cash account has no minimum balance requirement, making it an attractive option for those dipping their toes into the market for the first time.

Ally Invest®

On Ally's secure site

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for Self-Directed Trading. $100 minimum for Robo Portfolios

  • Fees

    Fees may vary depending on the investment vehicle selected. Self-Directed Trading has zero commission fees for stock, ETF, options trades; $0.50 per options contract. Robo Portfolios have zero management fees

  • Bonus

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  • Investment vehicles

    Robo-advisor: Ally Invest Robo Portfolios IRA: Ally Invest Traditional, Roth and Rollover IRAs Brokerage and trading: Ally Invest Self-Directed Trading

  • Investment options

    Stocks, bonds, ETFs, options, mutual funds, margin account and forex trading

  • Educational resources

    Offers informational articles to help users improve their understanding of investment strategies and market trends

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Charles Schwab allows investors to buy fractional shares so you can access big-name stocks without breaking the bank.

Charles Schwab

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One®Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit

  • Fees

    Fees may vary depending on the investment vehicle selected. Schwab One®Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract

  • Bonus


  • Investment vehicles

    Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One®Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account

  • Investment options

    Stocks, bonds, mutual funds, CDs and ETFs

  • Educational resources

    Extensive retirement planning tools

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Are dividends taxed?

While stock dividends are typically not taxed until the shares are sold, cash dividends are considered taxable income by the IRS. How they're taxed, however, depends on whether they're qualified or nonqualified: Qualified dividends, which have been issued by a U.S.-traded company to shareholders who have owned the stock for more than 60 days, are subject to capital gains tax rate.

All other dividends are considered nonqualified and are subject to standard income tax rates.

If you receive more than $10 in dividends, your brokerage will send you a 1099-DIV form with relevant information for completing your tax returns.

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A dividend is a portion of a company's profits that is paid to its shareholders, usually quarterly.

Dividends are more commonly offered by well-established companies that exhibit consistent but tempered growth over time.

Ordinary dividends are taxed at the standard income tax rate while qualified dividends are taxed at the capital gains rate.

Dividends are typically paid out by the share. If you own 100 shares of a company that is paying a dividend of $.25 per share, you will earn $25.

A dividend yield is a percentage that compares a company's stock price to the dividend it pays. It is one of several metrics investors will use to determine if a stock is profitable.

Bottom line

Stock dividends allow companies to share a portion of their profits with its investors. Dividends from stocks can be an additional source of passive income allowing individuals to further grow their finances.

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As an experienced investor and financial enthusiast, I've delved deep into the world of dividends and investment strategies. Dividends represent a crucial aspect of investing, offering shareholders a portion of a company's profits. Here's a breakdown of the key concepts discussed in the article:

What is a Dividend?

A dividend is a distribution of a company's earnings to its shareholders. This can be in the form of cash or additional shares, known as stock dividends. Companies typically issue dividends quarterly, although other frequencies like monthly or annually are also possible. Dividend payments are determined by the company's board of directors and serve to demonstrate financial stability and attract investors.

How are Dividends Paid?

Dividends are typically paid according to the number of shares an investor owns. Cash dividends are either sent as checks or credited to brokerage accounts for reinvestment. Stock dividends are paid in fractional shares, where shareholders receive a certain percentage of additional shares for every share they already own. Key dates related to dividend payments include the declaration date, ex-dividend date, record date, payment date, and settlement date.

How to Invest in Dividend Stocks

Investors can access dividend stocks through various channels, including individual company shares, mutual funds, or ETFs. Opening a brokerage account provides a gateway to invest in dividend stocks. Brokerage platforms like Ally Invest and Charles Schwab offer easy access to dividend-paying stocks with minimal fees and diverse investment options.

Are Dividends Taxed?

While stock dividends are typically taxed upon sale, cash dividends are considered taxable income by the IRS. The tax treatment varies based on whether the dividends are qualified or nonqualified. Qualified dividends, issued by U.S.-traded companies to shareholders who have held the stock for more than 60 days, are subject to capital gains tax rates. Nonqualified dividends are taxed at standard income tax rates.

Bottom Line

Dividend stocks offer investors the opportunity to earn regular income and benefit from the stability of established companies. Understanding dividend metrics such as dividend rate, payout ratio, and yield helps investors assess the value of dividend-paying stocks and make informed investment decisions.

In summary, dividends play a vital role in investment portfolios, providing investors with a steady income stream and potential tax advantages. By leveraging dividend stocks effectively, investors can enhance their financial well-being and achieve their long-term investment goals.

What are dividends and how do they work? (2024)
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