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Investing and Money Glossary, terms and definitions.

Dividend

The distribution of corporate earnings to shareholders.

Usually paid quarterly, dividends give shareholders a piece of the action right now, rather than rewarding owners only when they sell (and perhaps not even then). But not all companies pay dividends, and frankly, dividends aren't always desirable. Fast-growing smaller companies typically don't pay dividends, for instance, which is often fine with investors, who may not want any more taxable income now, and who believe the company can make those earnings grow more effectively anyway. (Dividends are taxable as ordinary income, a higher rate than capital gains, and must be put to work somehow elsewhere.)

Dividend yields have been at or near all-time lows lately as stock prices have soared. Yet dividends in general have been the subject of renewed interest, in part because of some popular investment theories, such as the Dow Dividend Theory. Michael O'Higgins, for example, has advocated listing the 10 stocks in the Dow Jones Industrial Average with the highest dividend yield (dividend divided by price), and buying the five with the lowest stock price, a strategy that would have beaten the Dow handily over the past 25 years.

As these Dow-based theories imply, dividends typically are paid by larger, more established firms, but some industries pay more than others. Utilities, such as electric power companies, are traditionally held for their dividends, but that industry is changing fast thanks to deregulation, and dividend cutting has been rampant. Real estate investment trusts, also big dividend payers, have soared in popularity in recent years.

 

 

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