What are Dividend Stocks?

By Kelly B. — Published February 14, 2018

What are Dividend Stocks?

In essence, a dividend may be defined as the distribution of the profits made by a company to the shareholders of its stock. A company can share its dividends in the form of cash payments or by furnishing additional shares of its stock to the shareholders. The board of directors of the company decides on what percentage of the profits should be extended to its shareholders in the form of dividends.

How are dividend stocks profitable?
As such, Dividend Stocks can be a profitable channel for the shareholders for achieving a steady income in the form of dividends that can be subsequently re-invested in exchange for more shares of the given stock. Basically, it is a great investment strategy for building long-term wealth.

A majority of the dividend stocks typically belong to well-established companies that have a solid reputation in the market and are financially mature and stable. That being said, the prices of stocks typically keep rising periodically and the shareholders can enjoy a steady flow of income in the form of dividends. And that’s not all. Large companies often announce an increase in their dividends from time to time making it an even more profitable investment prospect for its shareholders.

What are cash dividends?
More often than not, when a company is profitable, it extends a percentage portion of its revenues to the shareholders of its stock in the form of cash payments. The dividend is decided for a single share and the shareholders receive the payments in accordance with the number of shares they hold in the company. For instance, if a company announces a dividend of $10 per share, an individual holding 100 shares of its stock will be rewarded with $1000 worth of dividends.

What are Stock Dividends?
On the other hand, in some cases, a company might decide to extend its profits to its shareholders in the form of additional shares in the company’s stock. A company might decide to disburse additional stock dividends when either it is running low on capital that can be distributed or it wishes to maintain its existing liquidity for the purpose of subsequent investments. In such cases, since the company doesn’t want to disappoint its shareholders, it decides an alternative for the cash dividends in the form of stock dividends.

One of the major advantages of stock dividends is that they are not taxable unless they are sold off by the shareholder. That being said, stock dividends can be incredibly beneficial for those shareholders who are not in the need of immediate cash payments. As such, there are a lot of investors who prefer stock dividends over cash dividends any day.

The distribution of stock dividends is also carried out with a strategy similar to that of cash dividends in the sense that the shareholders are furnished the additional shares on the basis of the number of shares that they already hold in the company’s stock. So, for instance, if an investor holds 1000 shares of the company’s stock, and the company decides to pay a stock dividend of 10%, the former will receive a total of 100 additional shares as dividend. However, the market value of the shares remains unaltered.

Stock dividends may be categorized as small stock dividends and large stock dividends. If the stock dividend issued equates to less than 25% of the value of the shares held by the investor, it is termed as a small stock dividend. On the other hand, if its value exceeds 25% of the value of the shares outstanding, the dividend will be referred to as a large stock dividend.

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