Dividends: The Basics
Public companies pay dividends to their shareholders, typically in cash, as a means of expressing thanks for their continued support. Dividends are issued as a dollar amount paid per share of stock owned, so each investor receives a dividend commensurate with her ownership stake in the company.
For example, if company ABC has seven million shares outstanding and declares a 50-cent dividend, it pays $3.5 million in total dividends. A shareholder who owns 2,000 shares receives $1,000.
Investment in dividend stocks is a popular way to supplement existing income because it requires little effort. Though dividends are not guaranteed on ordinary shares of stock, many companies choose to pay dividends each year, or each month, as a way to demonstrate their continued profitability.
In some cases, companies that have done quite well may choose to issue one very large dividend that can provide a generous windfall for big investors. In 2004, for example, Microsoft (MSFT) paid out an unprecedented $3 dividend per share, for a total of $32 billion.
Benefits of Monthly Dividends
If you are looking to maximize retirement income, stocks that pay monthly dividends can be a great help. Having a steady stream of income throughout the year makes balancing your day-to-day budget much easier.
However, one of the chief benefits of monthly dividends is the opportunity for reinvestment and compounding. Dividend reinvestment is simply the practice of using dividend funds to purchase additional shares of stock.
Many trading platforms offer the option of automatically reinvesting your dividends for you, meaning your investment grows without you even lifting a finger. As the number of shares you own grows, so does your dividend each year, assuming the company's dividends remain stable. When you retire, you can begin taking your monthly dividends in cash to supplement distributions from your 401(k) or IRA.
(see also The Perks Of Dividend Reinvestment Plans)
Who Pays Monthly Dividends?
Companies in certain industries are more likely to pay monthly dividends than others, so it pays to do your research. Real estate investment trusts (REITs) receive income in the form of monthly rents, so it makes sense that some REITs also pay monthly dividend distributions.
Other companies required by law to pay out the majority of their income to shareholders are likely candidates for monthly dividend payments, as they need to redistribute their earnings regularly to avoid taxation.
Qualifying for a Dividend
Many people purchase certain stocks specifically because of the likelihood of receiving dividends. However, timing is everything when it comes to qualifying. When a company declares a dividend, it also announces the ex-dividend date, which is the date after which any share purchases are ineligible for the current dividend.
(read more Declarations, Ex-Dividends and Record Dates)
If ABC declares an ex-dividend date of April 15, the owners of stock purchased on or after April 16 do not receive the dividend, for example. Instead, the dividend is paid to the shareholder who owned the stock prior to April 15, despite the fact he no longer has a financial interest in the company. (For a deeper discussion, see How and when are stock dividends paid out?)