Using Dividends To Build Wealth: This video discusses using dividends to build wealth. A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders.
Dividends are payments made by a corporation to its shareholders as a distribution of the company’s profits or earnings. When a company generates profits, it has several options for what to do with those profits. One option is to reinvest them back into the company for growth and expansion, while another option is to distribute them to shareholders in the form of dividends.
Here are some key aspects of dividends:
- Purpose: The primary purpose of dividends is to return a portion of the company’s profits to its shareholders as a reward for investing in the company. Dividends provide shareholders with regular income and can be an important source of passive income for investors, particularly retirees or those seeking income-oriented investments.
- Types of Dividends:
- Cash Dividends: Most dividends are paid in cash, where shareholders receive a certain dollar amount per share of stock they own.
- Stock Dividends: In some cases, companies may issue additional shares of stock to shareholders instead of cash dividends. This is known as a stock dividend or a bonus issue.
- Dividend Reinvestment Plans (DRIPs): Some companies offer dividend reinvestment plans, which allow shareholders to automatically reinvest their dividends to purchase additional shares of stock.
- Frequency: Dividends can be paid on different schedules, depending on the company’s policy. Common frequencies include quarterly (four times per year), semi-annually (twice per year), or annually (once per year). Some companies may also pay special or one-time dividends in addition to regular dividends.
- Declaration and Payment: The declaration and payment of dividends are typically decided by the company’s board of directors. Once declared, dividends are paid to shareholders on a specific date known as the dividend payment date.
- Yield: Dividend yield is a measure of how much a company pays out in dividends relative to its stock price. It is calculated by dividing the annual dividend per share by the stock’s current market price and expressing the result as a percentage. Dividend yield is often used by investors to assess the income-generating potential of dividend-paying stocks.
- Tax Treatment: Dividends are typically taxed differently from other types of investment income, such as interest or capital gains. Qualified dividends, which meet certain criteria set by the IRS, are taxed at lower capital gains tax rates. Non-qualified dividends are taxed at ordinary income tax rates.
Overall, dividends play an essential role in rewarding shareholders for their investment in a company and can be a key consideration for investors when evaluating potential investments. However, it’s important to remember that not all companies pay dividends, and dividend payments are not guaranteed. Investors should conduct thorough research and consider various factors, such as a company’s dividend history, financial health, and growth prospects, when making investment decisions based on dividends.
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