Dividend – Easy Way to Understand

As some people are not familiar with dividend investing so here I am with a brief description on it. We will start with a glossary of dividend investing and its terms. So today topic will be what is a dividend?

What is a dividend?

Every investor wants to make more money for his/her future. Dividend investing is the best way to earn income, but they should first know about the dividends. I am sharing few simple things about dividends so that every investor can easily understand and generate the income.

Dividends are the payment that is made by a corporation for its shareholders. It may also call the portion of a company’s profit, paid out to stockholders. If a company earns profit then it can be used in two ways either it will be reinvested or distributed to shareholders. The cash is also distributed in two types: share repurchases or dividends. Generally dividends are paid in the form of cash, store credits and shares in the company. If your business is a sole trade or partnership, it can’t pay dividends.

Importance of Dividends

Dividends are an important part of investments. The performance of a dividend-paying company is determined by its annual income and its dividend yield. Dividends are mostly paid on a quarterly basis. Dividends increase the income that are a part of an investment’s total return and also offer an attractive return. The companies which pay dividends, usually historically stable. Dividends are also helpful to lessen the potential fall of a company’s stock price, so they are reducing volatility. The main important benefit of dividends is, you are allowed to reinvest them, usually without cost in the mutual fund and the stock. This is undoubtedly easiest way to earn more income.

What If The Company Pays Too Much?

If you take out more than you’re owed, there may be extra tax to pay. It is illegal for your company to pay out more in dividends than it has available as profit for this year or profit held over from a previous year. If you pay enough dividends that your year’s income goes over the level of the higher rate tax band you will have to pay more tax.

Things to Know before Investing In dividend stocks

When you are going to start your investment, you should always be aware about all the truth and facts. There are some things which you should know:

  • Always do your own research about the stock market.
  • Select some qualified and stable companies to invest your money. The companies which have a dividend history and pay dividend regularly are most stable companies.
  • Do not go with the high dividend yield stocks always concentrate on those stocks that have good dividends.

If the company’s got cash in the bank, surely it’s ok for it to pay a dividend?

Always remember that profit is not the same as cash in the bank. There are many non-cash items which can affect your profit i.e. depreciation of capital assets. So before you invest, make sure that you have checked your profit and loss account in order to see that you have enough profit available after tax. You can also find it in the mini profit and loss account on the overview screen.

Here is a picture in which you can see the illegal dividends paid by this company because the dividends are higher than the operating profit figure.

Dividend

Dividends come after corporation tax on the profit and loss account, so you should know that when you pay dividends, you have to allow for corporation tax to come first. If you have an accountant then you should talk to him or her that how much the company can pay out as dividend.

Whenever a company plans to pay a dividend, it must check its profit to make sure that it has enough to cover the dividend. After that you should have a meeting of the directors and produce board minutes and vouchers. If the company has only one director then minutes must be produced.

Summary –

There are many investors who see dividends as money for nothing but it can mean a lot of work for both the company and the investor. The consideration of paying or not paying a dividend include the stockholders’ wishes, the stock market’s reaction and the corporation’s need and opportunities for cash in the present and in the future.

This was the brief description on the topic about what is dividend. Tomorrow’s topic that we will be picking is Stock Dividend.

Hope this helps!!!!! Please rate if it is?

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