A Primer on Dividends
When looking for income-generating investments, some investors turn to dividend-yielding stocks.
When a company makes a profit, that money can be put to two uses:
It can be reinvested in the business.
It can be paid out to the company's shareholders in the form of a dividend, a taxable disbursement typically made quarterly or monthly.
Dividend Ratios
Investors track dividend-yielding stocks by examining a pair of ratios.1
Dividend per share measures how much cash an investor is scheduled to receive for each share of dividend-yielding stock. It is calculated by adding up the total dividends paid out over a year (not including special dividends) and dividing by the number of shares of stock that are outstanding.
Dividend yield measures how much cash an investor is scheduled to receive for each dollar invested in a dividend-yielding stock. It is calculated by dividing the dividends per share by the share price.
Other Dividend Considerations
Investing in dividend-paying stocks can create a stream of taxable income. But the fact that a company is paying dividends is only one factor to consider when choosing a stock investment.
Dividends can be stopped, increased, or decreased at any time. This is unlike interest from a corporate bond, which is normally a set amount determined and approved by a company's board of directors. If a company is experiencing financial difficulties, its board may reduce or eliminate its dividend for a period of time. If a company is outperforming expectations, it may boost its dividend or pay shareholders a special one-time payout.
When considering a dividend-yielding stock, focus first on the company's cash position. Companies with a strong cash position may be able to pay their scheduled dividend without interruption. Many mature, profitable companies are in a position to offer regular dividends to shareholders as a way to attract investors to the stock.
Qualified dividends are taxed at a maximum rate of 20%. Ordinary dividends are taxed at the same rate as federal income taxes, or between 10% and 37%. State income taxes also may apply.2
Be cautious when considering investments that pay a high dividend. While past history cannot predict future performance, companies with established histories of consistent dividend payment may be more likely to continue that performance in the future.
In a period of low interest rates, investors who want income may want to consider all their options. Dividend-yielding stocks can generate taxable income, but like most investments, they should be carefully reviewed before you commit any dollars.
Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
The information in this article is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
Dividend FAQs
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Dividend-yielding stocks are shares of companies that distribute part of their profits directly to shareholders in the form of dividends, typically paid monthly or quarterly. These stocks can offer investors an opportunity to generate ongoing income.
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Dividends are commonly tracked using two ratios:
Dividend per share, which shows how much cash is paid per share annually.
Dividend yield, which measures how much income an investor receives for every dollar invested in the stock.
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Dividend-paying stocks can provide steady income, but dividends are not guaranteed. A company’s board may increase, decrease, or pause dividend payments at any time based on financial performance.
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Investors should review the company’s cash position, financial stability, history of dividend payments, and long-term outlook. Mature and profitable companies may be more likely to maintain consistent dividends.
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Dividends are taxable income.
Qualified dividends may be taxed at a maximum federal rate of 20%.
Ordinary dividends are taxed as regular income, which ranges from 10% to 37% federally.
State income taxes may also apply for Connecticut residents.
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Not necessarily. Very high dividend yields can sometimes signal financial instability. While past performance can offer insight, it cannot guarantee future dividend payments or stock performance.
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A financial advisor—such as Atlantic Wealth Advisors in Glastonbury, Connecticut—can help evaluate dividend-paying investments, assess tax implications, and create an income strategy aligned with your long-term financial goals.
1. Investopedia.com, July 28, 2025
2. Investopedia.com, January 22, 2025
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2025 FMG Suite.
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