What is the Difference Between a Stock and a Dividend Stock?

In the realms of investing, financial portfolios and the market, two words you may often hear in conjunction with one another are: stocks and dividends. While related, there are some key differences between a stock and a dividend. 

It is important to start by ensuring that you have a solid understanding of each entity. First, a stock is considered ownership. When you have stock in a company, that means that you share ownership of that company. This makes you a partial owner! Purchasing and keeping stocks is one way to increase your wealth and can help you achieve your long term financial goals. 

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A dividend, while related to a stock, is not the same thing. A dividend is a payment issued to the stockholder, typically on a quarterly basis, by the company in which you’ve invested stock. For example, if you have stock in a company that decides to issue a 10% dividend per share, and the company’s shares are worth $500, then the dividend is $50. 

One way in which stocks and dividends are alike is that they both thrive as the value of the company rises. The value of stocks increases directly with a company’s rise in success. In addition, only companies that are well-established and profitable typically pay out dividends to shareholders

A key difference between these two entities is that stocks represent ownership while dividends represent income. In addition, dividends tend to be a more consistent and regular source of income.

Are Stocks That Pay Dividends Worth Buying?

If you are wondering if purchasing dividends is right for you, the answer to this question depends on your individual financial situation. Specifically: 

  • Your personal financial goals
  • Your risk tolerance
  • Your investment strategy and motivation

A huge benefit to dividends is that they provide a steady stream of income. This regular income can add up over time, and be a great way to passively grow your wealth. However, depending on the company you invest with and the share amount, the income that you make from the dividends may grow a bit more slowly. A benefit to this steady income is that it can cover your regular living expenses such as housing (rent or mortgage payments) and debt payments (credit cards, student loans or car title loans) leaving any other income free to be spent or invested.

In addition, typically companies that pay out dividends are oftentimes well established and successful institutions. This means that investing in these companies comes with a lower risk, and you can count on this company to do well. 

However, it is important to remember not to rely too heavily on any income that you may glean from dividends. A company has the right to suspend dividends during a rough patch or tough economic times. 

Generally speaking, the following groups of individuals should consider seeking out dividend stocks: 

  • Investors looking for an additional stream of steady income
  • Individuals who are looking to invest long-term
  • Conservative investors with a lower risk tolerance

Dividends can be a positive contribution to your diversified portfolio! Through careful examination of your individual financial situation, you can determine if dividend stocks can be an asset for you! 

How Do Dividends Get Paid Out?

Another way to look at dividends is that they are a company’s way of sharing and paying out their profit. 

When it comes to how dividends are actually getting paid out, they are sent as a check to the investor or as a credit to a brokerage account. In addition, sometimes dividends are paid out in additional shares of certain stocks. 

How Long Do You Have to Own a Stock to Get a Dividend?

When it comes to timing, there are two important words to know if you are wondering how long you must own a stock to get a dividend. Those words are: 

  1. Ex-dividend date
  2. Record date

The ex-dividend date is the cutoff date that is determined by the company by which individuals need to purchase a stock in order to be eligible to receive an upcoming dividend. 

By definition, the record date is the date that finalizes the transfer of the stock’s ownership. This date is determined by the board of directors of a company, whereas the ex-dividend date4 is determined by stock exchange rules. On top of this, the record date is the date or length of time for which you must own a stock in order to be eligible for a dividend. 

Does Every Stock Pay Dividends?

The short answer to this question is no: not all companies pay dividends. Stocks that do not pay dividends are considered “non dividend paying stocks.” In general, these types of companies are usually industries with quick growth, such as technology. Typically, these companies place more emphasis and focus on growth and the innovation of new ideas over paying out dividends to shareholders. 

On a similar note, if you are debating investing in stocks you may want to familiarize yourself with dividend policies. A dividend policy outlines how a specific company will distribute its various dividends to shareholders. It is important to read the fine print here! Many companies will include language around how they can change their dividend policies. For example, some companies will state that they can change their policies based on the company’s performance rate and other priorities. 

Many investors also approach stocks and dividends with a very specific investing strategy. It is advantageous for certain investors to seek out stocks that pay out dividends so that they can have a steady flow of passive income. 

What Are The Benefits of Stocks Without Dividends?

If you have the opportunity to invest in different stocks that pay out dividends, you may be wondering why anyone would pass up this opportunity. There are a variety of reasons why investors would select stocks that do not pay out dividends. 

Some companies take the money that they would typically pay out on dividends and utilize those funds to help grow and expand their company. As previously discussed, the success of a company directly correlates to the overall success of the shareholder. Therefore, companies that invest in their expansion and growth are likely successful companies that are thriving and earning wealth for their shareholders in other ways! 

Overall, the strategy behind if a company pays out dividends or not depends on the corporate strategy of that individual company. Through careful research and staying up-to-date on the market and trends you can decide if making the decision to invest in a company that pays out dividends is the right financial move for you! 

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