Some institutional investors are restricted to investing in companies that pay dividends.
This is a factor in some companies' decisions.
Let's assume the directors decide to pay a dividend.
The date of payment and other important dates must be indicated once that is done.
The date of record, payment date and ex-dividend date are important to stockholders.
The dividends that have just been declared will be paid to all investors who are official stockholders as of the close of business on that date.
The stock will be sold without the dividend for three business days up to and including the date of record.
If you sell a stock after the ex-dividend date, you will get the dividend.
The buyer of the stock won't have held the stock on the date of record.
The seller will still hold the record.
If you sell the stock before the ex-dividend date, the opposite will happen.
The new shareholder will receive the dividend if he or she is the holder of record.
Consider the following sequence of events to see how this works.
Cash Cow, Inc.'s board of directors declared a quarterly dividend of 50 cents per share on June 3, which will be paid on June 18.
The payment date is June 30.
If you bought 200 shares of the stock on June 15 you would receive a check in the mail after June 30 in the amount of $100.
If you purchased the stock on June 16, the seller of the stock would not receive the check because he or she is not the owner of the record.
Companies usually pay dividends in the form of cash.
Sometimes they pay dividends by issuing more stock.
Sometimes companies pay dividends in other ways, such as a stock spin-off or samples of the company's products.
Cash dividends are more common than other forms of dividends.
Firms pay cash dividends more often than other types of dividends.
Cash dividends tend to increase as companies' earnings grow.
The average annual increase in dividends is 3% to 5% for companies that pay cash dividends.
This trend is good news for inves tors because a steadily increasing stream of dividends tends to shore up stock returns in soft markets.
This is a measure of dividends on a percentage basis rather than on a dollar basis.
A stock's current income is a percentage of its price.
A company that annually pays $2 per share in dividends to its stockholders and whose stock is trading at $40 has a dividend yield of 5%.
In May 2015, Nordic American Tankers paid a quarterly dividend of $0.38 per share, which equates to an annual dividend of $1.52.
Firms don't always pay out all of their earnings as dividends.
Instead, they reinvested some of their earnings as dividends.
If the company had earnings of $4 a share and paid annual dividends of $2 a share, it would have a 50%Payout ratio.
Stockholders don't like to see high payouts.
It is difficult to maintain high payouts and may lead the company into trouble.
The company paid dividends to investors in the last year.
Almost two-thirds of the company's earnings were used to pay dividends and the other third was reinvested.
The federal tax code changed in 2003 to reduce the tax on dividends, which resulted in an increase in the appeal of cash dividends.
Prior to this time, cash dividends were taxed as ordinary income, meaning they could be taxed at high rates.
Common stoCks were taxed at lower preferential rates.
After 2003 both dividends and capital gains were taxed at the same rate.
That makes dividend-paying stocks more attractive to investors in higher tax brackets.
Firms responded in two different ways to the tax change.
Firms that already paid dividends increased their dividends.
From 2003 to 2005, the total dividends paid by U.S. companies increased by 30%.
Many firms that had never paid dividends started paying them.
In the year leading up to the tax cut, about four firms per quarter started paying dividends.
The economy began to recover from the most recent recession.
In 2010 the amount of dividends paid by U.S. companies was $197 billion, and in 2013 it was $302 billion.
Paying dividends is fashionable all over the world.
In the year of 2013, publicly traded companies worldwide paid over $1 trillion in dividends for the first time, and companies worldwide paid about $4.4 trillion in cash dividends.
A firm may make a stock dividend.
The firm pays its dividend by distributing additional shares of stock.
If the board declares a 10% stock dividend, you will receive 1 new share of stock for each 10 shares that you currently own.
When you receive a stock dividend, you don't receive cash.
The total value of your holdings in the company is basically unchanged as the number of shares outstanding increases due to the dividend.
A stock dividend is a cosmetic change because the market adjusts share prices downward according to the terms of the stock dividend.
In the example above, a 10% stock dividend leads to a 10% decline in the stock's share price.
The total market value of your investment would be $20,000 if you owned 200 shares of stock that were trading at $100 per share.
After a 10% stock dividend, you would own 220 shares of stock, but each share would be worth about $90.
The total market value of your investment would remain the same if you owned more shares but they were trading at lower prices.
There is one bright spot in this.
Stock dividends are not taxed until you sell the stock.
Cash dividends can be reinvested into additional shares of the company's common stock in these corporate sponsored programs.
It is shown in Table 6.2 that such an approach can have an impact on your investment position over time.
More than 1,000 companies offer reinvestment plans.
The plans give investors a convenient way to accumulate capital.
Most DRIPs allow partial participation, and most stocks are acquired for free.
The price of the stock increases at an annual rate of 8%.
Some plans will sell stocks to their DRIP investors at below-market prices.
Most plans will credit fractional shares to the investor's account, and many will allow investors to buy additional shares of the company's stock.
If you enroll in the General Mills plan, you can purchase up to $3,000 worth of the company's stock each quarter for free.
Send a completed authorization form to the company to join the plans.
The number of shares you hold will increase with each dividend.
There is a catch.
You must still pay taxes on these dividends even though they are additional shares of stock.
Reinvested dividends are treated as income in the year they are received, just as if they had been received in cash.
As long as the preferential tax rate on dividends remains in effect, paying taxes on stock dividends will be much less of a burden than it used to be.
Explain how the decision is made.
Common stocks are attractive to investors because of their potential for both current income and stability of capital.
The market has a wide range of stocks.
The kinds of stocks that investors seek depend on their investment objectives.
Several of the more popular types of common stocks will be examined, as well as the various ways in which such securities can be used in different types of investment programs.
The risk and return profile of a stock can be different depending on the company that issued it.
Some of the characteristics include whether the company pays a dividend, the company's size, how rapidly the company is growing, and how susceptible its earnings are to changes in the business cycle.
A classification scheme developed by investors helps them place a particular stock into one of several categories.
The categories help investors design their portfolios with a good balance of risk and return.
Blue chip stocks, income stocks, growth stocks, tech stocks, cyclical stocks, defensive stocks, large-cap stocks, mid-cap stocks, and small-cap stocks are some of the cat egories that you hear most often.
The cream of the crop is blue chips.
Not all blue chips are the same.
Some give high dividends; others are more growth oriented.
Market information about P&G's stock can be found in the introductory part of a typical investment research report.
In addition to a real-time quotation and hold recommendation, the report provides a company summary, price chart, consensus recommendations, and more for P&G.
Some companies with high-yielding blue chips include AT&T, Mcdonald's, and Pfizer.
Most stocks are riskier than blue-chip stocks, but they are not immune from bear markets.
They appeal to investors who are looking for quality investments with growth potential.
Blue chips appeal to investors who want to earn higher returns than bonds typically offer.
Some stocks are appealing because of their dividends.
These issues have paid higher-than-average dividends in the past.
Income stocks are ideal for people who want a high level of current income from their investment capital.
Unlike bonds and preferred stocks, holders of income stocks can expect their dividends to increase frequently.
All rights belong to the person.
Some protection from inflation is provided by dividends that grow over time.
Some income stocks may be paying high dividends because of limited growth potential.
It's not unusual for income Secu rities to have low earnings growth.
Common stoCks are unprofitable or lack future prospects.
Most firms with shares that qualify as income stocks are highly profitable.
Quality blue chips and income stocks are among the giants of the U.S. industry.
American Electric Power, Duke Energy, Oneok, Scana, DTE Energy, and Southern Company are some of the public utilities in this group.
General Mills, ConAgra Foods, and Altria Group are some of the industrial and financial issues in this group.
Income stocks are not exposed to a lot of market risk.
They are subject to interest rate risk.
A good growth stock will have a sustained earnings growth of 15% to 18% when most common stocks grow at a slower rate.
Steady earnings growth is combined with high returns on equity by established growth companies.
They have plenty of cash flow to service their debt and high operating margins.
Growth stocks include Amazon.com, Apple, eBay, and Starbucks.
Some growth stocks rate as blue chips and provide quality growth, while others represent higher levels of speculation.
Growth stocks usually don't pay dividends.
Their payouts are usually 10% to 15% of earnings.
These companies use most of their profits to finance growth.
Growth stock investors earn their returns through price appreciation rather than dividends, and that can have both a good and a bad side.
These stocks are hot when the stock market is rising and the economy is strong.
These stocks are often in a big way when the markets go down.
Growth shares are popular with investors who are looking for capital gains rather than dividends and who are willing to take more risk.
Tech stocks have become such a dominant force in the market that they deserve to be in a class of their own.
They include companies that make computers, data storage devices, and software.
They include companies that provide internet services.
The majority of these stocks are traded on the Nasdaq.
Some of the stocks are legitimate blue chips, but they would probably fall into either the growth stock category or the spec ulative stock class.
Tech stocks have the potential for high returns, but they also have a lot of risk and are best suited for the risk-averse investor.
The tech-stock category has some big names, like Apple and Intel.
Many not-so-big names, like Advantest, L-3 Communications, and Electronic Arts, are also included.
Maybe investors' hopes are spurred by a new management team that has taken over a troubled company or by the introduction of a promising new product.
Sometimes it's the hint that some new information, discovery, or production technique will help the growth of the firm.
Special breed of securities enjoy a wide following when the market is bullish.
The earnings of speculative stocks are highly unstable.
These stocks pay little or nothing in dividends because of the wide swings in price.
The chance to "hit it big" in the market is offered by speculative stocks such as Sirius XM Radio, Bona Film Group, and Global Power Equipment Group.
An investor needs to identify the big-money winners before the rest of the market does.
A strong stomach and a lot of investor know how are required for speculative stocks to be risky.
They are used to seek capital gains, and investors will often aggressively trade in and out of these securities.