Dividends: What They Are and Why They Matter

Dividends are a key component of stock investing, providing income and stability. Let’s explore this topic in greater depth.

Types of Dividends:

1. Cash Dividends:
   • What They Are: Payments made in cash, typically quarterly.
   • Example: Coca-Cola pays a quarterly dividend of $0.42 per share.
2. Stock Dividends:
   • What They Are: Additional shares given to shareholders.
   • Example: A company might issue a 5% stock dividend, giving shareholders 5 extra shares for every 100 they own.
3. Special Dividends:
   • What They Are: One-time payments, often due to exceptional profits.
   • Example: Microsoft paid a special dividend of $3 per share in 2004.

Dividend Metrics:

• Dividend Yield: Annual dividend per share divided by the stock price.
  • Example: A stock paying 4annuallywithapriceof4annuallywithapriceof100 has a 4% yield.
• Payout Ratio: Percentage of earnings paid as dividends.
  • Example: If a company earns 10pershareandpays10pershareandpays4 in dividends, the payout ratio is 40%.
• Dividend Growth: The rate at which dividends increase over time.
  • Example: A company that increases its dividend from 1to1to1.10 has a 10% dividend growth rate.

Why Dividends Matter:

• Passive Income: Provides regular income for investors, especially retirees.
• Stability: Dividend-paying companies are often more stable and mature.
• Example: Johnson & Johnson has increased its dividend for over 50 consecutive years, making it a “Dividend King.”

Dividend Reinvestment Plans (DRIPs):

• What They Are: Programs that allow shareholders to reinvest dividends into additional shares.
• Example: If you own 100 shares of a company and receive $100 in dividends, a DRIP would automatically buy more shares for you.