What Is A Dividend Stock?

Investors may often come across the term ‘dividend payment’, or some other synonymous phrase. What exactly is a dividend stock?

A dividend stock is a company that distributes a portion of its earnings back to its shareholders, either in the form of cash or additional stock. There are far fewer dividend payers on Wall Street than non-payers for a number of reasons that we’ll outline in a minute. In fact, out of the famous FAAMG stocks, only Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) currently pay a dividend, with Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), and Google (NASDAQ: GOOG) showing no signs of offering one. 

If you own a sizable chunk of stock that pays out dividends, then this is an income that you can reinvest into the rest of your portfolio, or even better if your position becomes large enough, it might serve as a source of income when you retire.

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Why do companies pay dividends?

One of the main arguments for dividend payments is that it provides certainty and confidence in the company’s financial wellbeing. Traditionally, only the most stable companies have paid out dividends — Coca-Cola (NYSE: KO), Colgate (NYSE: CL), Johnson & Johnson (NYSE: JNJ), and other consumer staples. Some ETFs like the Proshares S&P 500 Dividend Aristocrats ETF (BATS: NOBL) focus exclusively on companies that have not just paid dividends but grown them for at least 25 consecutive years, with most doing so for 40 years or more.

Generally, it is an attractive incentive to invest in a company and sends a clear message as to the business’s future outlook as well as encourage more people to invest, thus sending its stock higher. It’s a simple answer as to why a company pays dividends, but why they wouldn’t is more complicated. 

Why don’t all companies pay dividends?

When discussing dividends, many investors probably think it is simply a benefit to investors as it provides steady income, but it is a little bit more complicated than that. There’s a reason that Tesla (NASDAQ: TSLA) or Netflix (NASDAQ: NFLX) don’t give out cash to their fanatic followers.

By paying out dividends, a company is spending profits that otherwise could have otherwise been used in research or growth of the business. High-growth companies would be better served to reinvest their profits into things like research & development, which will benefit both the company and its shareholders in the long run. 

Another factor against dividends derives from investors’ faith in a company that pays out. While it suggests that a business is financially sound, lowering a dividend price could set off panic among investors and will likely lead to a sell-off, even if its financials are still healthy and it just needed to divert funds for major innovations. 

Finally, many studies have found that having no dividend payment is more favorable for investors as it is actually taxed higher than capital gains. 

What companies pay dividends?

You’ve seen a few examples already of companies that pay dividends, including Apple and Microsoft, who were joined by AT&T (NYSE: T) and ExxonMobil (NYSE: XOM) among the highest dividend payers in 2019. 

If you wish to find more companies that provide dividend payments then it is always best to do some research on sites such as Yahoo Finance and CNBC, or you could go straight to ‘the source’ and research company filings on the U.S. Securities and Exchange Commission’s website using their EDGAR system.

Should I only invest in dividend-paying companies? 

Factors such as age, investing strategy, and risk tolerance go into this decision. One common misconception surrounding dividend payments is that they will always pay out, which is not always the case, while a growth stock could actually be a better return on investment over time.

Take Shopify (NYSE: SHOP) for example, which has grown more than 200% in the past year, but does not pay dividends. Meanwhile, even if you have a $500,000 dividend stock portfolio yielding 3% that’s only $15,000 a year, while a $500,000 investment in growth stocks could return far more. Again, it’s all down to a matter of choice.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above Read our full disclosure policy here.