Do Dividends Increase Equity?

by Aurelio Locsin, Demand Media

    If you want to increase your wealth beyond what is capable through bonds or traditional savings accounts, the stock market is an option. When the stock of a company in which you have an investment position goes up, the value of the shares you own also rises. You risk a loss of money, however, if the value of the stock price falls. Relying on stock appreciation plus the dividends they pay is one way to increase your wealth, especially if you’re young and looking for long-term gains.

    Stocks

    Selling shares of common stocks is one way companies earn cash. They use the money from such sales to launch new products, expand facilities or increase production. Owning shares gives you a piece of a company and lets you vote on its direction. The value of stocks in a company that is profitable goes up because more people want to buy shares. It goes down if the company loses money because more people want to sell shares. Another way stocks can add to your wealth is through dividends, which is how companies share extra profit with stockholders.

    Dividends

    Companies issue dividends in two ways: cash and stock. Cash dividends add money to your account. You get them at a certain amount per share of stock that you own. The more stock you own, the more money you receive. Cash dividends do not increase your equity because you do not own more of the company.
    You can sign up for a dividend reinvestment program. Rather than receiving money when cash dividends are issued, they are reinvested toward the purchase of additional shares. These programs increase your equity, since the additional stock lets you own a higher percentage of the company.

    Stock Dividends

    Companies also issue dividends in the form of stock. Rather than getting money, you receive additional shares equal to a percentage of what you already own. For example, a company can grant a 20 percent stock dividend. If you own 100 shares, you receive an additional 20 shares. If you own 1,000 shares, you get 200. Stock dividends are issued at the same percentage to all stockholders. Your equity does not increase because everybody owns the same proportion of the company that they did before. Only the number of shares issued increases.

    Investing

    If you’re interested in buying stocks, sign up with a broker who handles the actual buying and selling based on your instructions. A discount broker offers no advice, requiring that you do your own research, but their commissions are lower. A full-service broker can offer personal service and recommendations, but their fees are higher. Either type can provide you with a list of stocks that regularly pay dividends, the form and value of the dividends, and the cost of the stock. You can also find this information on many business and financial periodicals and websites.

    About the Author

    Aurelio Locsin has been writing professionally since 1982. He published his first book in 1996 and is a frequent contributor to many online publications, specializing in consumer, business and technical topics. Locsin holds a Bachelor of Arts in scientific and technical communications from the University of Washington.