The stock market is one of the greatest inventions of building wealth. Through the years, it played a major role in financial institutions and investors. Building your portfolio is quite a challenge, but you’ll be able to reap the fruits of your right decisions in the future. Imagine this – earning profit just by watching your company succeed and get dividends in the process. Yes – it is considered your company because you’re already sharing its ownership. When the company earns, you get the benefits as well.
The last thing that you don’t want to do is to sell your shares when the company is at its peak. You have to understand that succeeding in the stock market requires a lot of decision making – it’s best to get the right ones. This road to financial freedom has built an empire of trading system that’s considered by many as gambling. It may have the risks, but pushing your luck won’t get you any further to success.
What are Dividends?
When you buy a share of a dividend stock, you are going to be paid a portion of the corporation’s profit. To put it simple, you will be paid just by owning stocks. For example, a company may pay an annual dividend of 40 cents per share. If the company pays quarterly, you will be able to receive 10 cents every quarter. Now, imagine owning 100 000 shares in a corporation – given the annual dividend of 40 cents, you will be able to get at least $40 000 annually.
Dividends are classified into two categories – the cash dividends and special dividends. Cash dividends are paid out of a company’s profit while the special dividends are additional dividends (that happens rarely) from winning a major litigation or liquidation of investments. So, when do you get paid from your shares?
Here are two of the most important things that you have to remember in dividend pay outs:
Declaration date
This is the day the board of directors intends to pay dividends. The company will create a liability – that they owe money to their stock holders, and announce the record and payment date.
Date of Record
This is the time when a company reviews its record identify the people (the investors/share holders) that will receive the pay out. The issue that lies in this process is the ex-dividend date or the second business day before the record date – if you have bought the shares of a company on or after the ex-dividend date, you won’t be able to receive its upcoming pay out. Thus, you have to remember this date and make sure to purchase shares before the ex-dividend date.
Understanding Dividend Tax
It must be great to own a part of a corporation or business and earn profit from it, but you have to understand that dividends are subject to government tax. It’s every investor’s responsibility to pay for investment taxes whether you own an insignificant amount of shares. It is commonly paid on distributions of regular corporations to their stock holders. The only dividends that are not tax-deductible are those of the corporation.
There are two types of dividend tax rates:
Qualified Dividends
The qualified dividend tax rate is set in a bracket given for ordinary dividends – these are stocks held more than 60 days during a 121-day period. Investors in a lower income tax bracket will pay 5% dividend tax and those with 25% income tax bracket will pay 15% dividend tax.
Non-Qualified Dividends
The non-qualified dividend is any dividend that doesn’t meet the standards of a qualified dividend. In this case, investors who are most likely in the 35% tax bracket will pay 35% dividend tax.
If you are going for a long-term investment, the DRIP or Dividend Reinvestment plan is a great tool that you can use. This allows you to buy more shares in the company with the use of interests. It is an automated procedure that’s easily administered upon the enrollment of the plan. Of course, this plan requires fees that are relatively small compared to the benefits along with it. Just remember that your dividend tax qualification might change in this process.