A stock dividend is a certain type of payment made to a shareholder by a stock company. Usually, stock dividends are paid to shareholders to distribute profits made by the company. The payment of stock dividends must be approved by the shareholders.
If you want to invest in companies that are currently paying big dividends, it is best to start looking among mature and well-established companies rather than start-ups and high-growth companies. Start-ups and companies that are expanding rapidly tend to use their profits for growth rather than to pay the shareholders. Another tip is to start looking at companies in the following sectors, because they are famous for their large dividends:
- Oil and gas
- Basic materials
- Real estate
- Bank and financial
Stock dividends do not have to be paid in cash; stock dividends can be virtually anything – including physical property or shares of stock.
Most jurisdictions (and exchanges) require that each individual share in the company must receive the same amount when stock dividends are paid. So, a person owning 500 shares will get twice as much as the person owning 250 shares.
The most common dividend is the fixed schedule dividend. Many public companies have a fixed schedule for paying dividends to their shareholders.
The opposite of a fixed schedule dividend is the special dividend. Shareholders can for instance agree that a special dividend is to be paid out when the company has made a substantial change to its financial structure or when it has achieved exceptionally high earnings that are not believed to mark a sustained increase in earnings.
Favorable tax treatment
In many jurisdictions, your income from dividends will not be taxed as hard as your other forms of income from capital. This can be a strong incitement for investors to purchase shares in companies known for large and regular dividend payouts. This is especially true for individuals in high marginal tax brackets that need to plan carefully to avoid being bumped up a notch by the tax man. With the right portfolio, you can create a nice tax-advantaged cash flow from dividends.
Common dividend payout policies
When it comes to dividends, many different polices exists for payouts. One commonly utilized method is the constant payout. With a constant payout, the company pays a specific percentage of its earnings in dividends each year. A stable dividend policy on the other hand is used by companies that wish to maintain a stable dividend pay from year to year, even if company earnings vary. A third example of a common dividend payout policy is the residual dividend policy, where the company retains a part of the earnings to finance the equity portion of its capital budget, before using residual earnings to pay dividends to the shareholders.
Dividend reinvestment program
When you purchase stock in a company that pay dividends, you may be invited to a dividend reinvestment program (DRIP). If yo agree, your will not get any cash dividends, because the company will use the cash to purchase company stock for you. Instead of getting cash, you get to own more stocks. Of course, having more shares means a larger dividend next time, and so on.