What is a dividend?

Cheat Sheet:

  • A dividend is cold, hard cash some companies pay out to their shareholders.
  • Mature companies that make steady profits are more likely to pay dividends.

The way most people think of making money in the stock market is by buying low and selling high. For certain stocks, you can also make money just by holding the stock. These are called dividend stocks.

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Dividend Yield

Cheat Sheet:

  • Dividend yield tells you how generous a company’s dividend is.  You can use it to comparison shop.
  • The higher the company’s dividend yield, the more cash you’ll receive for every dollar you invest.
  • Older investors often use high dividend yield stocks as a steady source of income.

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BRAIN TEASER

You buy stock a day before the ex-date and sell it the day after the record date.  Who gets the dividend when it’s paid out a month later?

A.  The prior owner

B.  You

C.  The new owner

Answer

Dividend Reinvestment

Cheat Sheet:

  • Using a dividend to buy more of that stock is called “dividend reinvestment.”
  • When you do this, you end up with more shares of stock instead of cash.

If a company issues a cash dividend, it will normally show up as cold, hard cash in your brokerage account. At some brokerages, you can buy more stock with the dividend for free so that you own more shares instead of holding extra cash.

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What is a stock split?

Cheat Sheet:

  • A stock split divides up the company into more shares so each share is more affordable.
  • The overall company’s value doesn’t change, nor does the total dollar amount of stock you own.
  • Stock splits are decided by the company’s board of directors.

Owning 1 share of stock worth $50 is the same thing as owning 2 shares worth $25 a piece, right?  A stock split divides the company into more shares so that each share is more affordable.

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BRAIN TEASER

On Friday, June 6, 2014, Apple closed at $645.57 per share. Apple did a 7-for-1 stock split over the weekend. What was its share price when the market opened on Monday morning?

Answer