Dividends Explained 2022

What is a dividend?

A dividend is the distribution of some of a company's earnings to a class of its shareholders. It is basically a company paying you to buy and hold their company stock.

dividend reinvestment graph

The thing I love about dividends is that it triggers a process that Albert Einstein called the “8th wonder of the world”, compound interest. Albert had some extra folds in his brain that allowed him to understand mathematics on a level that I’ll frankly never understand. Einstein put huge emphasis on the power and strength of compounding, now view your investments through that same lens and hopefully you have a new understanding of what compound interest will do for your portfolio.

How do Dividends work?

A dividend is paid per share of stock you own. If you have 30 shares and the company pays $3 in annual cash dividends, you’ll receive $90 per year in dividend income.

When a dividend is paid to your account you have free reign to do what ever you want with that cash. You can keep it as cash, reinvest the cash into the same stock, or buy another stock with the cash. There may be some limitations as to what you can do if the dividend stock is in a 401k or other retirement account. The funds will need to stay in there unless you want to incur a penalty.

dividends pay cash

If the investment account you have is a taxable brokerage you can pull that money out and buy yourself something nice. But if you wan to keep the snowball rolling you can reinvest that money and let the compounding begin. In my opinion you didn’t work at all for that dividend money so you may as well put that money back to work for yourself.

How often do Dividends pay?

Let’s start from small to large here. Dividends can pay out monthly, quarterly, semi-annually, and annually. When looking at how much you get paid you simply divide the dividend yield by the amount of times they pay yearly to et an idea of how much you’ll get paid. The company often has this information on the “investors” section of their website.

How much is the dividend tax?

The amount of tax you’ll pay is based off your income. There are three brackets you will be placed in, 0%, 15%, and 20%.

For the year 2022 there are three tax brackets for dividends. It is based off income see following table to know what you will be taxed from dividend income.

Tax

Single

Married Filing Jointly

Married filing separate

Head of household

0%

$0 - $41,675

$0 - $83,350

$0 - $41,675

$0 - $55,800

15%

$41,676 - $459,750

$83,351 - $517,200

$41,676 - $258,600

$55,801 - $488,500

20%

$459,751 +

$517,201 +

$258,601 +

$488,501

 

Why buy dividend stocks?

Stocks that offer a dividend can provide a stable and comfortable income stream that you can pour back into the stock itself. It is a very viable strategy when it comes to investing. Investors can strategically invest into companies that offer dividends that increase every year. In fact there is a title that some dividend paying companies obtain called the dividend aristocrats.

What is a Dividend Aristocrat?

A dividend aristocrat is a company that has raised it’s dividend consistently for 25 years. These companies are well established companies that are all household names and will pay you handsomely in the form of dividends. The problem with these stocks is that they are generally over priced so the increase in dividend income takes a while to earn back compared to other growth type investments. These are generally best bought after huge market dips or if you’re looking to receive consistent income.

Now go get some XP from my article about my Top 3 favorite growth dividend stocks.

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