Dividends are a key part of how investors can earn income from stocks. They represent a portion of a company’s earnings that is distributed to shareholders, often on a quarterly basis, and can be a valuable source of passive income and long-term portfolio growth.
How Do Dividends Work?
When companies earn a profit, they may choose to reinvest in the business, hold reserves, or return value to shareholders in the form of dividends. These dividends are typically paid in cash, but may also be issued as additional shares of stock.
Dividends are usually quoted on a per-share basis (e.g., $0.50 per share), and most are paid quarterly. Investors who own shares as of the record date receive the dividend on the payment date, often through direct deposit or reinvestment in the company’s stock.
Types of Dividends
There are two main types: qualified dividends and ordinary dividends. Qualified dividends meet specific IRS criteria and are taxed at favorable long-term capital gains rates (0%, 15%, or 20% depending on income). Ordinary dividends are taxed as regular income and may apply if certain holding period requirements aren’t met.
The Role of Dividends in Your Investment Strategy
For many investors, especially those approaching or in retirement, high-quality dividend stocks can provide a steady stream of income while offering the potential for capital appreciation.
Dividends also offer:
- A buffer in volatile markets
- The opportunity for reinvestment and compounding growth
- Consistency from mature, stable companies
Some investors build portfolios specifically focused on high-quality dividend stocks to generate ongoing income that supplements pensions, Social Security, or withdrawals from retirement accounts.
How Foster & Motley Can Help
At Foster & Motley, we build portfolios designed to grow and sustain wealth over time, with dividends playing a key role in that process. Whether you’re seeking a steady stream of income, growth, or a blend of both, we help you make informed investment decisions with tax efficiency and risk management in mind.
Interested in how dividend strategies could fit into your portfolio? Schedule a discovery call to speak with an advisor today.
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