When most people think of investing, the first thing that comes to mind is buying stocks to make money from capital appreciation. However, did you know that you can also make money from dividends? Let’s talk about what dividends are and why they are important. We will also break down the dividend yield and show you how to calculate it. Finally, we will talk about the tax implications of receiving dividend income.
What is a dividend?
Dividends are a source of income, and the technical definition of a dividend is a distribution of a company’s earnings approved by the company’s board of directors. Dividend payments are frequently paid out quarterly and are received as cash payments or reinvested as additional stock in the company.
What is a dividend yield?
A dividend yield is a financial ratio based on the amount of money paid by that company divided by the price of that share. The financial ratio (Dividend/Share Price) is calculated annually and shown as a percentage. For example, if company X has a share price of $100, it pays out a quarterly dividend of $1. The annual dividend is $4, and the price is $100. So the dividend yield is ($4/$100) or 4%. Keep in mind that the price of publicly traded companies, index funds, ETFs, and mutual funds are constantly changing. The current price and dividend do not predict future dividends or stock prices. Always understand that investments have risk, do your research, and consult your financial advisor to understand dividend investments before making them.
Why are dividends important?
Dividends are important because they offer a way to make money from investments outside of buying and selling stocks for gain. It is a reward from a company for investing in that company. Companies that issue dividends often have information and research available on current and future dividends.
Yes, dividends are income, and they are, for the most part, taxed. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gains rates. The dividend payer must correctly identify each type and amount of dividend. Always consult your tax preparer or CPA regarding tax information and how it applies to you.
How to budget for dividends?
Do you need to factor into your budget for dividend income? We have you covered if you’re going to budget accurately for that dividend income! You will select what you want to budget for dividend income and the dividends you expect. Then you can compare your budgeted dividend income against your actual dividend income. If you need help figuring out how much dividend income you make, look at your brokerage account statements! These monthly statements will have the dividends you have received summarized and detailed. Check out how easy it is to budget on My Financial Snapshot below.