Dividend income is paid to shareholders from a company’s earnings, and can be used or reinvested. It is discretionary and generally taxable, and some companies pay dividends to attract investors.
Dividend income is a type of income that is made available to shareholders in some companies. It is derived from a company’s earnings and is paid per share. Shareholders generally have the option of using their dividend funds or reinvesting them. It is important for potential shareholders to realize that dividend income is discretionary and generally taxable.
To understand dividend income, you need to understand a little about stock ownership. When a person buys shares in a company, they become a partial owner. The amount of the company that he owns is represented in shares. For example, if ABC Company’s stock is $5 US Dollars (USD) per share, an investment of $50 USD would give a person 10 shares.
When a company makes a profit, it may decide to distribute a portion of it as dividend income to shareholders. When this is done, the company decides how much it will pay per share. ABC Company, for example, may decide to pay a dividend of $1 USD. This means that the person with 10 shares would receive $10 in dividend income.
Some people receive and use these funds as they would any other income. However, many people choose to reinvest their dividends instead of receiving distributions. This means that they choose not to accept dividends in the form of cash. Instead, they choose to use the funds to automatically buy more shares. Many financial advisors suggest this option because when a stock is successful, reinvestment allows a person to earn more from these funds.
All companies do not provide their shareholders with dividend income, even if they make a profit. Those that do generally distribute the funds on a regular basis. Many companies choose to pay dividend income quarterly.
It is important that shareholders who hold dividend-paying stocks realize that continuing this practice is completely discretionary. A company can stop distributing dividends and change the rate at will. Anyone considering dividend-paying stocks should also be aware that these funds are generally taxable.
Some companies that pay dividends do so to make themselves attractive to investors. They provide this type of income because even though they make a profit, their share prices tend to be stable. While stability has its benefits, it also defeats the purpose of investing for many people who do it with the intention of growing their money.
Smart Asset.
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