Investing wisely during your working life can help ensure that you and your spouse enjoy financial freedom during retirement. Even if you aren't a financial whiz, a solid understanding of investment basics can be invaluable for making better financial decisions. "Stocks" and "dividends" are common financial terms that describe different, yet closely related investment concepts.
A stock is a share of ownership in a corporation. Many large companies choose to sell shares of stock to the public as a means of raising money to fund business growth. Stockholders can freely sell their shares of stock to other individuals through a stock exchange, so the prices of stocks can rise and fall over time according to market demand. Buying shares of stock in the hopes that they will increase in value over time is one of the most common ways to invest for retirement.
A dividend is a payment that some companies make to their stock shareholders. Companies with steady earnings sometimes choose to pay dividends to shareholders from their earnings as a way to attract investment. You can use any website that offers in depth stock quotes to check whether a company offers a dividend. The annual dividends are typically listed as "div" or "yield." Companies that offer dividends are often large, established corporations that cannot grow as quickly as smaller companies. Examples of corporations that pay dividends to stock shareholders include Wal-Mart, McDonald's, AT&T, Coca-Cola and Verizon. Some companies pay dividends in the form of additional shares of stock instead of cash. Companies might offer stock dividends if they don't have enough liquid cash earnings to pay cash dividends, or if they want to commit cash toward growth. Cash and stock dividends are paid to shareholders according to a schedule determined by the corporation. Many companies issue dividends on a quarterly basis. For stock dividends, extra shares are added to the shareholder's account and for cash dividends, payments are sent to the shareholders. Most stock brokerages let you automatically reinvest cash dividends back into the companies that pay them.
Benefits of Dividends
Investing in stocks that pay dividends offers a few advantages over other stock investments. Dividend payments give investors incentive to hold on to stock shares longer, which can reduce the volatility of stock prices of dividend-paying stocks. Dividends can also provide you with an income stream without selling any shares, which can be valuable for retirees. In addition, you can choose to reinvest dividends to purchase more shares of stock, which can result in accelerated investment growth over time.
Taxes on Stocks and Dividends
When you sell a share of stock for a profit, you have to pay capital gains tax on the profit. The capital gains tax rate is generally 15 percent for investments held longer than a year. Short-term gains on investments held less than a year are taxed at your ordinary income rate. Any cash dividends you receive from stock investments during the year are considered a part of your annual income and are subject income taxes.
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