Many people make their money on the stock market by following the old adage of buying low and selling high. However, that's not the only way to make money -- and it certainly creates a conundrum for you if you think the stock price is going to continue rising but you have no other way to get income from the company besides selling. Another way to make money is by picking stocks that pay dividends, which are payouts of the company's profits to the shareholders based on the number of shares they own.
Research the history of dividends that a company has paid out. A history of increasing dividends bodes well for future dividend payouts. According to the Kiplinger website, when a company consistently pays out dividends, shareholders come to expect the dividend checks to continue flowing, which in turn forces the company to plan ahead for making continued payments.
Invest your money in a portfolio of stocks that have a history of paying high dividends. That way, you can expect to receive a steady stream of income without selling your stocks. In addition, if you find yourself needing money, there's nothing stopping you from selling your shares and cashing out.
Hold the stock for at least 60 days of the 121-day period starting 60 days before the ex-dividend date, so that the dividends qualify as long-term capital gains. If you hold it for less than 60 days, you still get the dividend but it's taxed at the ordinary income rates. Because your long-term capital gains rate is always lower than your ordinary tax rate, this maximizes the amount you get to keep.
- Dividends aren't a get rich quick scheme where you can just buy the stock right before the dividend and then sell it after. When a company pays a dividend, it's stock price typically drops by the same amount of the dividend because the company is worth that much less. For example, say a company has $100 million in assets and it pays a $1 million dividend. The company is now worth only $99 million, and the stock price will generally change to reflect that.
- Dividends aren't guaranteed, so no matter how well the company has performed in the past or how many consecutive years it's raised its dividends, you're not promised to receive dividends in the future.
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