Marc Cuniberti: What is a dividend?
April 1, 2018
Dividends are payments by companies to people who own their stock. When we think of a bank savings account we think of the interest they might pay us. With stocks, there can be different types of payments and dividends are one kind of payment.
Think of it like a thank you note for buying a company's stock. Some stocks and funds pay dividends and some do not.
Let's say you buy a stock of Jack's Warehouse (fictional). The stock is a dividend paying stock. Let's also say you buy a share of Jill Muffin Company (fictional) and Jill's doesn't pay a dividend.
Jacks stock says it will pay a dollar a share annually, paying 25 cents on a certain day every three months. Over the course of a year, that amounts to a buck. Note I didn't say a percentage but an actual dollar amount and in this case a buck.
For example, say you bought both Jill's stock and Jacks stock at 10 bucks on Jan. 1 and at the end of the year both stocks are at 11 bucks. Each had the same increase in price, one dollar from 10 to 11. Both stocks made 10 percent for you. Jacks stock, however, also paid you a dividend of a dollar. Nice.
Keeping in mind dividends are listed in dollar amounts and not percentages, if you buy a stock for 10 bucks and get a dollar dividend you made 10 percent on the dividend.
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However, if the stock drops in price such as in a market crash, and the company keeps the dividend, the next buyer, since he buys the stock at a lower price — say 8 bucks — he still gets a dollar a share in dividends so he makes more percentage wise and in that particular case comes out to 12.5 percent.
One reason why if you buy dividend stocks you might make the argument you like market crashes because your yield percentage wise is greater.
Understanding what dividends can do
Can a dividend be cut, eliminated or even increased? Absolutely.
Dividends are not guaranteed. But keep this in mind. Usually company CEO's, VP's and board members get stock as part of their compensation. So they benefit from the dividends as well. The more shares they hold the more they make as well.
The dirty little secret, however, is dividends can be taxed at lower rates then salaries. Single taxpayers can now make $50,600 (in 2018) and still qualify for the zero-percent tax on dividends and capital gains. Joint filers and surviving spouses can make $101,200, and head of household filers can make $75,700.
When you compare that to personal income statistics in the U.S., you'll see that about 70 percent of taxpayers in the U.S. can qualify for the zero rate on dividends and capital gains.
Even if you make too much money to qualify for the zero percent tax rate on dividends and capital gains, you can still qualify for a special low 15 percent rate.
So do you think company execs want to cut or eliminate your dividend when they get them too and might pay less tax than their salaries?
All in all if you like the possibility of income or just growing your nest egg, and you consider some stocks pay dividends and some don't, which would you rather own?
For more information feel free to contact me below.
Dividends are not guaranteed and can be decreased, increased or eliminated at any time. Dividends do not guarantee against losses. Dividends may be taxable in certain types of accounts and stocks which pay dividends does not mean losses, either partial or total are not possible. Please review the prospectus of any company you are considering and consult with your investment professional before making any investment decisions. Investing involves risk. You can lose money. This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. He is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. He can be contacted at 530-559-1214 or at SMC Wealth Management, 164 Maple St #1, Auburn. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com.