I keep reading about the stock dividend and cant figure out in my head how it works (Im dumb) can someone enlighten me about how can I fully understand its concept like suggesting some non complicated and comprehensible books (because english is not my first language)
Does all stock have dividends? and what is the most intelligible definition and concept of dividend?
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2 Answers
Not all stocks pay dividends.
Remember that stocks represent ownership of a company. If a company issues 1,000 shares of stock and you own 100 of them, you own 10% of the company.
A dividend is when a company decides to give some of its cash to the owners of the company (rather then using it to grow the company). If the same company above gave $10,000 in "dividends" ($10 per share), you'd get 10%, or $1,000 of it.
An interesting side effect of dividends is that they do not create wealth. The company is worth less as a result since it gave up some of its assets (cash) with nothing in return. So if your 100 shares of stock were worth $100 each and it paid $10 per share in dividends, those shares would now be worth $90 per share. So you'd go from having $10,000 in shares to $9,000 in shares and $1,000 in cash.
answered Dec 9, 2021 at 14:15
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And sadly, you'd owe income taxes on that $1,000 dividend. If the company kept that cash then your stock would retain its value and you could sell 10 of your shares and only have to pay the (lower) long-term capital gains tax. Dec 11, 2021 at 5:58
After some period of operating the business, the managers of the company look at their books, and make a positive decision to take some cash they have access to (*), and distribute it to the owners of the company.
The management identifies the total amount of cash to distribute. They then divide this by the total quantity of shares owned by the owners. This value is the dividend that each share will receive.
(*) I'm being a little cagey with the wording here. The business doesn't necessarily need to be profitable to generate the cash used for the dividend; they just need access to the cash. Indeed, a business can take out a loan or bond (assuming they can get it) and use that cash to pay a dividend. This is one of the common strategies that can occur during a "leveraged buyout with dividend recapitalization" based on a once-trendy theory taught in MBA programs that managers will perform better with the discipline of paying bond interest.
answered Dec 9, 2021 at 14:27
