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Key Terms

Dividend payment

This is the per-share payout that a company makes to its stockholders, usually on a quarterly basis.

Stock price

This is the current market price of the company’s stock.

Distribution frequency

This is the number of dividend payments per year. In most cases, companies pay dividends quarterly but may also distribute dividends annually or on a discretionary basis.

What is the dividend yield?

The dividend yield is calculated by dividing the sum of all dividend payments over the course of the year by a company’s stock price. It represents the percentage of the stock price that is returned to stockholders over the course of a year in the form of cash payments. For many investors, dividend payments represent a significant portion of return on investment for a retirement portfolio.

Who qualifies for dividend payments?

You are eligible to receive a dividend payment if you owned the stock before the ex-dividend date. If you purchase the stock after the ex-dividend date, you need to hold the stock until the next ex-dividend date to qualify for future dividend payments.

What factors affect dividend payments?

Dividends are distributed at the discretion of a company’s management and board of directors. Companies typically source dividend payments from earnings or borrowed funds. In many cases, dividend-paying stocks are mature, stable companies with a long track record of profitability. Not all stocks pay dividends. Less mature companies often reinvest profits to grow the business, rather than distribute excess earnings to stockholders.

Ultimately, a business’s ability to make dividend payments depends on its profitability. A successful company typically raises its dividend payments over time, whereas a company that encounters difficulties may be forced to cut or suspend dividend payments.

Are dividends taxed?

Qualified dividends are treated as capital gains by the IRS. You may owe 0 percent, 15 percent, or 20 percent tax on income from dividends, depending on your tax bracket. In some cases, “ordinary dividends” are taxed at the less favorable ordinary income rate. However, you may be able to reduce your tax liability if you hold dividend-paying stocks in a tax-advantaged retirement account such as a 401(k) or Roth IRA.