Dividend stocks how does it work

They're paid on a regular basis, and they are one of the ways investors earn a return from investing in stock. But not all stocks pay dividends — if you are interested in investing for dividends , you will want to specifically choose dividend stocks. There are several types of dividends a company can choose to pay out to its shareholders. Cash dividends. The most common type of dividend.

Companies generally pay these in cash directly into the shareholder's brokerage account. Stock dividends. Instead of paying cash, companies can also pay investors with additional shares of stock.

Dividend reinvestment programs DRIPs. Investors in DRIPs are able to reinvest any dividends received back into the company's stock, often at a discount. Special dividends. A company often issues a special dividend to distribute profits that have accumulated over several years and for which it has no immediate need. Preferred dividends. Payouts issued to owners of preferred stock. Preferred stock is a type of stock that functions less like a stock and more like a bond.

Dividends are usually paid quarterly, but unlike dividends on common stock, dividends on preferred stock are generally fixed. Limited time offer. Terms apply. In the United States, companies usually pay dividends quarterly, though some pay monthly or semiannually. A company's board of directors must approve each dividend. The company will then announce when the dividend will be paid, the amount of the dividend, and the ex-dividend date.

The ex-dividend date is extremely important to investors: Investors must own the stock by that date to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. Investors who sell the stock after the ex-dividend date are still entitled to receive the dividend, because they owned the shares as of the ex-dividend date. Stocks that pay dividends can provide a stable and growing income stream. Investors typically prefer to invest in companies that offer dividends that increase year after year, which helps outpace inflation.

Dividends are more likely to be paid by well-established companies that no longer need to reinvest as much money back into their business. High-growth companies, such as tech or biotech companies, rarely pay dividends because they need to reinvest profits into expanding that growth. The most reliable American companies have a record of growing dividends — with no cuts — for decades.

Dividends on common stock are not guaranteed. However, once a company establishes or raises a dividend, investors expect it to be maintained, even in tough times. Because dividends are considered an indication of a company's financial well-being, investors often will devalue a stock if they think the dividend will be reduced, which lowers the share price.

One note: Investors who don't want to research and pick individual dividend stocks to invest in might be interested in dividend mutual funds and dividend exchange-traded funds ETFs. These funds hold many dividend stocks within one investment and distribute dividends to investors from those holdings. But there are other types of dividends you could receive, including stock dividends and opportunities to do some dividend investing. We'll get to all that in a minute. Dividends are like the cherry on top for investors—a little something extra to sweeten the deal.

But why do companies shell out dividends? Say you buy 10 shares of Acme Inc. Those funds are usually paid straight into your brokerage account. Pretty simple, right? But not all stocks pay dividends. Some companies decide to reinvest their profits in their company rather than paying dividends.

The catch is that the board also has to get shareholder approval through a vote on the distribution of the dividends. Generally speaking, well-established companies with long histories of growth and earnings are more likely to pay dividends. Start-up or new companies are usually so focused on growth that they choose to reinvest their profits in the company rather than paying dividends.

Still, that can add up if you own a lot of shares, and remember, dividends are paid quarterly. Dividend yield is a little more complicated. Companies that have a history of paying dividends usually continue to pay them. On top of getting bonus money, a lot of folks like dividends because they can come with some tax advantages.

Before you can cash in on any tax advantages, you need to know if you have qualified stock dividends or nonqualified stock dividends. Other investments, and even some insurance companies, also pay dividends. Mutual funds that hold stock in companies that pay dividends can pass along those dividends to shareholders who have the option of getting a payout typically once a year or having dividends reinvested in additional shares of the fund.

This is because retirement accounts require shareholders to reinvest any dividends paid by the fund. Bonds are another type of investment that can pay dividends. In exchange for your loan, the company or government agrees to pay you a fixed rate of interest, aka a dividend. Unlike stock dividends, bond dividends are a legal obligation, meaning the company or the government entity you loaned money to has to pay you dividends.