Equity ownership
When a corporation sells shares of its own stock, these represent ownership in the company. In other words, a purchaser of even just one share of stock in a company is an owner of the company, albeit a very small owner. As a company prospers, it has the option to reinvest profits back into the business. A shareholder benefits from this investment of profits as the company grows and the value of its shares of stock increase.
Another way for a shareholder to benefit from a company’s profits is to receive a portion of the profits as a direct payment from the company in the form of a payment called a dividend.
Entitlement to dividends
When a corporation announces a decision to pay a dividend to shareholders instead of reinvesting all profits back into the business, this is known as a declaration date. But not all shareholders are entitled to receive a declared dividend. Only the owners of shares issued prior to a date, known as the ex-dividend date, may receive the declared dividend. People who purchased their shares after the ex-dividend date can participate in future dividend declarations, but are not entitled to the current one.
Using dividends for retirement income
Some companies have a history of declaring dividends on a regular basis. For example, Coca-Cola has a long history of paying dividends to its shareholders. Its dividends have steadily increased since 1962. A stock with a history of increasing the amount of its dividends from year to year might be a good source of income. Stockholders have a choice of receiving the dividend as a quarterly payment, or in some cases, to use the dividends to purchase additional shares of stock through a dividend reinvestment plan.
Finding dividend-paying stocks
Your financial planner might be able to recommend companies with a history of paying dividends and those companies whose dividends have increased each year as a hedge against inflation. Your advisor might also recommend dividend income funds that invest in stocks with a history of paying dividends. The dividends collected by the income fund are distributed to the fund’s investors. Some funds offer a dividend reinvestment plan for those individuals who do not need or want the income payment.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published November 19, 2014.