In the stock market, the best way to get money to work for you is through the purchase of dividend paying stocks. These are securities which pay the shareholder a percentage of profits according to how many shares they own, and the return can be significant.
How They Pay
The definition of a dividend is literally a distributed portion of a company’s earnings. To further break this down, it is a percentage voted on by members of the board, and may be only for a specific class of investors. Dividend-yielding stocks are taxed as regular income, but as long term capital gains with a lower tax rate, they are an intelligent addition to a portfolio. Short term earnings from these stocks are respectable as well, so long as the additional income does not get eroded by taking the person into a higher tax bracket.
To choose stocks for a cash flow generating portfolio, investors can pick them individually, or invest in exchange-traded funds and mutual funds. Finding the percentage the stock or fund pays is done by looking at the dividend yield, which is a percentage of the market value. The choices can then be divided into domestic and foreign securities, or other criteria.
There are three important dates to pay attention to regarding dividends. The first is the ‘declaration date,’ which is when the company’s board declares they will be paying the shareholders. They are now liable to the stockholders for the date and time set out in the declaration.
The second is the ‘date of record’ which indicates the ex-dividend date. Essentially, if the investor owned the stock before this date, they are entitled to a payout, if it was purchased after they receive nothing. The final important time is the payment date, when dividends are actually paid. With few exceptions, the listed yield is paid out four times every year.
Different Payouts
There are three possibilities for receiving payment when a company profits. The first is cash, which pays the preferred shareholders first, and the common stockholders with the remainder. This is either money sent directly to the investor or deposited into their account electronically. Property payouts are another type of dividend, and can be in the form of commodities such as gold, silver, and other precious or industrial metals. Other items of value such as coffee and perishable commodities can also be used in place of cash.
Finally, there are ‘one-time dividends,’ which are a rare occurrence often prompted by legal action in the company’s favor, or a sudden influx of cash from liquidation of assets. These one time payments can be delivered as either cash or property. If these payments are classified as ‘return of capital,’ they are considered non-earned income and tax free.
Living off of the dividends from a deep portfolio of high-yielding stocks is an aspiration for many investors. To make it a reality, a thorough evaluation of every company invested in comes first, followed by consistent investment over time. For long-term results, watch the markets carefully, and don’t wait too long to get rid of a failing business.
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