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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.
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