Dividend Investing Can Enhance Your Income

The following is a guest blog post:

To earn gains for holding stock shares, one of the most successfully consistent trading strategies is to invest in dividend stocks. Dividend investing allows you to potentially reap the benefits of capital gains (the share price of your stock moving higher), while receiving a dividend from the company. One can evaluate the notional value of the dividend one is receiving, as well as the dividend yield that the shares are paying. In addition, it’s important to know that if the dividend one is receiving qualifies to receive beneficial tax rates. Otherwise, one might be subject to higher tax rates for unqualified dividends.

When Do You Receive a Dividend?

To receive a dividend from a company like Apple, McDonalds or Coca Cola, you must hold the stock through the company’s ex-dividend date. The ex-dividend date generally comes within two-business days of the record date when the company announces to the public the dividend that it will pay to share holders of record. The ex-dividend date is also usually right around the time a company releases its financial results. Most of the time, the price of the stock incorporates the size of the dividend, so the shares will generally increase into the ex-dividend date and decline by the amount of the dividend following the ex-dividend date. If you buy the shares on or after the ex-dividend date, you are not eligible to receive a dividend.

What is the Dividend Yield?

A company will generally pay a dividend back to its share holders once a quarter. Companies are rewarding their shareholders with dividends and paying them to hold onto their shares for the long term. When you evaluate a dividend you receive from a company, you want to analyze both the notional value you receive as well as the yield. The notional value is the size of the dividend. For example, Apple pays an annual dividend of $2.92 per share. You also want to determine the yield which is the sum you receive divided by the amount of capital you need to post per share. With Apple shares near $207 per share, the dividend yield is 1.4%. This can be compared to a dividend on McDonalds shares of $4.04 annually, which provides a dividend yield of 2.55%. Coca Cola pays a dividend of $1.56, which provides a dividend yield of 3.4%.

Dividend Tax Rates

The tax rate on dividends can vary.  Prior to purchasing a stock for income via dividends, you should be aware of the different types of tax consequences you might face. Most dividends on common stocks like AAPL, MCD and KO are considered ordinary, but some ordinary dividends are qualified dividends. The difference can have an impact on your portfolio. Dividends you receive as part of your savings or money market account (which are generally not shares like AAPL, MCD or KO) are unqualified dividends. Employee stock options are also unqualified.

If you are relying on the dividends to enhance your income, you want to make sure you don’t unqualify your dividends by failing to hold the stock for the proper amount of time. If you are a top earner in the United States, the difference between the tax rate is approximately 14% between unqualified and qualified dividends. Dividend income can augment your investing strategy, allowing you to potentially get paid while you hold your shares.

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