Matt's Money: A primer on dividends

When interest rates reach historic lows, as they have over the past 10 years, some investors in search of income-generating investments turn to dividend-yielding stocks.

Dividends are taxable payments made by a company to its shareholders. When a company makes a profit, that money can be put to two uses — it can be reinvested in the business or it can be paid out to the company’s shareholders in the form of a dividend.

Some dividends are paid quarterly and others are paid monthly. Investors track dividend-yielding stocks by examining a pair of ratios.

The first ratio is the Dividend Per Share Ratio. This ratio measures how much cash an investor is scheduled to receive for each share from a dividend-yielding stock.

It’s calculated by adding up the total dividends paid out over a year (not including special dividends) and dividing that by the number of shares of stock that are outstanding.

The Dividend Yield ratio measures how much cash an investor is scheduled to receive for each dollar invested in a dividend-yielding stock. It’s calculated by dividing the dividends per share by the share price.

Investing in dividend-paying stocks can create a stream of taxable income. But the fact that a company is paying dividends is only one factor to consider when choosing a stock investment.

Dividends can be stopped, increased, or decreased at any time.

Unlike interest from a corporate bond, which is normally a set amount determined and approved by a company’s board of directors.

If a company is experiencing financial difficulties, its board may reduce or eliminate its dividend for a period of time. If a company is outperforming expectations, it may boost its dividend or pay shareholders a special one-time payout.

When considering a dividend-yielding stock, focus first on the company’s cash position.

Companies with a strong cash position may be able to pay their scheduled dividend without interruption.

Many mature, profitable companies are in a position to offer regular dividends to shareholders as a way to attract investors to the stock.

Dividend income is currently taxed at a maximum rate of 20 percent.

Be cautious when considering investments that pay a high dividend. While past history cannot predict future performance, companies with established histories of consistent dividend payment may be more likely to continue that performance in the future.

In a period of low interest rates, investors who want income may want to consider all their options.

Dividend-yielding stocks can generate taxable income but, like most investments, they should be carefully reviewed before you commit any dollars.

Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change.

And shares, when sold, may be worth more or less than their original cost.

The information in this article is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.

Please consult legal or tax professionals for specific information regarding your individual situation.

Securities offered through Royal Alliance Associates, Inc. Member FINRA, SIPC. Advisory services offered through Matt Montgomery, a Registered Investment Advisor not affiliated with Royal Alliance Associates, Inc., 1504 East Rusk, Jacksonville, Texas, (903) 586-3494, * An Index is a portfolio of specific securities (common examples are S&P, DJIA, NASDAQ), the performance of which is used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.