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What Are Dividends?
When considering the profit they make on stocks, many
investors assess the gains they have obtained based on the appreciation of
the stock on the open market or the gains they obtained after selling the
stock for more than the original purchase price. However, it’s also wise to
include the income acquired from stock dividends, if any.
Dividends are taxable payments to shareholders from a
company’s earnings. These payments generally come from retail profits and
tend to be distributed in the form of cash or stock. They are usually paid
quarterly, and the amount is determined by the company’s board of directors.
Dividends are most often quoted by the dollar amount each
share receives, put simply, the dividends per share. They can also
be stated in terms of a percent of the current market price, designated as a
dividend yield. The dividend yield is the annual dividend income
per share divided by the current stock price.
Many mature, profitable companies offer regular dividends to
shareholders. However, if a company experiences losses during the year or
needs any earnings to be reinvested back into the business, it’s always
possible that it could decide to suspend dividends. It’s important to
remember that a company can decide to increase, decrease, or stop paying
dividends at any time.
Rather than pay dividends to shareholders, many companies
with current high growth rates choose to reinvest their earnings back into
their businesses. On the other hand, some stable companies that haven’t
experienced much growth might pay dividends to provide an incentive for
investors to purchase their stock.
Before 2003, dividends were taxed at ordinary income tax
rates reaching as high as 35%. But as a result of changes to the tax law,
corporate dividends are currently taxed at a maximum rate of 15%; this lower
rate will expire at the end of 2010 unless Congress acts to extend it.
Because payouts have become more attractive to shareholders, many companies
with high growth rates are offering dividends.
When investing in the stock market, it’s important to
remember that the return and principal value of stocks fluctuate with
changes in market conditions. Shares, when sold, may be worth more or less
than their original cost.
© 2007 Emerald Publications
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