Dividend stocks are shares of companies that pay dividends to their shareholders. You can take advantage of dividend stocks to boost your ROI, weather tough markets and generate passive income.

What is a dividend stock?

Dividend stocks are issued by publicly-traded companies that regularly pay dividends (often in cash) to their shareholders. Some ETFs and mutual funds also issue dividends.

Companies fund dividends out of their corporate profits after – or instead of – investing in future growth. Depending on the company, investors may receive dividends monthly, quarterly or annually in addition to special one-time payments.

Why do companies pay dividends?

Companies pay dividends to share profits with investors, prove they’re valuable investments and incentivize buying and holding stock. Attracting long-term investors willing to weather downturns can benefit companies by leading to price stability.

Some firms also use dividends to grow their investor reach with new or high-yield dividends. While these can indicate that a company is performing well, too-high dividends can suggest that a company isn’t investing in future growth.

Since dividends are paid from profits, it’s rare to see startups or growth-oriented firms distribute dividends that could be used elsewhere. Similarly, companies with large debts may allocate incoming revenue toward decreasing liabilities instead of paying investors.

Companies that aren’t confident they can maintain payments may refrain from offering dividends at all to avoid the bad press that accompanies suspending future payments.

How do stock dividends work?

You can add dividend stocks to your portfolio through taxable brokerage and/or retirement accounts. Either way, when your assets pay dividends, your portion will automatically deposit into your account. Some companies and funds also offer dividend reinvestment plans that purchase fractional shares with your dividends.

How much do dividend stocks pay?

Most stocks pay dividends that come out to just pennies per share. Exactly how much you receive depends on factors like:

• Board of Director decisions
• The dividend payment schedule
• The number of shares you own

For instance, say the Hairy Walrus Company pays an annualized dividend of $1 per share on a quarterly basis. If you own 100 shares, you’ll receive 25 cents per share ($25 total) every quarter, or four times per year.

While that may not seem like much, that money adds up quickly – especially when you reinvest your dividends.

What is a stock dividend?

Sometimes, companies issue shares of stock instead of cash payments. This usually happens when a company wants to reward investors but needs its cash elsewhere.

Stock dividends also carry special perks for investors. Unlike cash dividends, which are taxed the year they’re earned, stock payouts aren’t taxed until they’re sold.

Important dates to remember for dividend stocks

Investors should watch four important dates when it comes to dividend stock:

• The declaration date is the date the Board of Directors approves and announces the next dividend. This process creates a liability on the company’s balance sheet, as the announcement effectively constitutes a debt to shareholders. 
• The ex-dividend date, or ex-date, is the cutoff for investors to buy stock and receive the upcoming dividend. If investors buy shares on or after the ex-date, the dividend goes to the seller. The ex-date usually falls 1-2 business days before the date of record. 
• The record date is the date by which you must appear as a “shareholder of record” on the company’s books. The record date typically falls 1-2 business days after the ex-date. 
• The payment date is the date when shareholders receive their dividends. 

What stocks pay dividends?

Typically, dividend-paying stocks are issued by well-established companies with a history of consistent or growing profits.

These often originate from industries like basic materials, consumer goods, energy, finance, healthcare, telecommunications and utilities. Examples include:

• Apple
• Chevron
• Microsoft
• Nike
• Pfizer
• Sherwin-Williams
• Verizon
• Wells Fargo

Dividend aristocrats

Dividend aristocrats are particularly famous among dividend investors. These are companies within the S&P 500 that have increased their payouts for at least 25 consecutive years, like:

• AT&T
• Exxon Mobil
• IBM
• Target
• Walmart

Dividend kings

Dividend kings are even more impressive. These public companies have paid and increased their dividends for at least 50 consecutive years. (Unlike dividend aristocrats, they’re not necessarily members of the S&P 500. As such, it’s possible for a company to be a king but not an aristocrat, or even both.)

Dividend kings often hail from hardy sectors like consumer staples, industrials, healthcare and utilities, like:

• 3M
• AbbVie
• Coca-Cola
• PepsiCo
• Stanley Black & Decker
• Target

REITs

Shares of real estate investment trusts (REITs) are required to pay dividends, making them popular among some income investors. However, REITs carry unique risks that investors should vet thoroughly before investing.

How to use dividend stocks in your market strategy

You can invest in dividend stocks through both taxable and tax-advantaged accounts. But you don’t want to add stocks willy-nilly – it’s important to vet individual companies, funds and even the types of dividends. Here are the strategies and factors to consider before diving in headfirst.

Qualified vs nonqualified dividends

Dividends come in two basic tax statuses: qualified and unqualified.

Qualified dividends are issued by eligible corporations to investors who hold assets for a specific period of time. They “qualify” for special treatment that means investors pay long-term capital gains rates instead of higher income tax rates. Qualified dividends keep more money in your pocket, making them suitable for income investors, retirees, and both regular and tax-advantaged accounts.

Unqualified (ordinary) dividends do not qualify for special treatment, meaning they’re taxed at ordinary income tax rates. As such, these assets may be better suited for your tax-advantaged retirement accounts, which defer or even eliminate your tax burden.

Individual stocks vs funds

Individual stocks across a variety of industries and market caps pay dividends. However, they’re not all made equally. When buying dividend stocks, you’ll want to analyze factors like their:

• Dividend yield
• History of payment increases
• History of profits 
• Upcoming growth opportunities

You’ll also have to put more work into diversifying your portfolio so you don’t take unnecessary risks.

By contrast, dividend-focused funds are baskets of dividend-paying stocks. While they offer instant diversification and require less work, actively-managed funds may charge higher expense ratios that eat into your returns.

Boosting your portfolio’s performance

When the economy tanks, investors often add dividend stocks to their defensive strategy. These income-generating assets help boost returns, minimize losses and provide extra ballast in rough waters.

Taking advantage of DRIPs

Dividend reinvestment plans (DRIPs) reinvest cash dividends into your portfolio to accelerate your long-term growth. Some companies offer DRIPs for their own shares, while many funds have options to turn on automatic reinvestments.

Protect your portfolio with Q.ai

Dividends can hugely impact your long-term gains by helping you build passive income. Dividend stocks also provide an extra buffer against volatility that can boost stability and minimize losses.

But dividends aren’t the only way to protect your portfolio through thick and thin.

With a wide range of Investment Kits and unique hedging options, Q.ai can help you grow wealth and hedge your bets at the same time.

Diversify into new industries and trends with Kits that fight inflation and recession, expose you to the broader market and bring true value to the table.

Top it off with a dash of Portfolio Protection, and you’re well on your way to securing your financial future.