So you got a dividend. Congrats! But what exactly does that mean?
If you invest in stocks and ETFs, you might be surprised when you receive something called a dividend. A dividend is one way you earn money on your investments. In fact, if you receive one in your Stash portfolio, you’ll get an email letting you know. We’ll explain what a dividend is, and how you can use dividends to increase your investments with a tool called DRIP.
What is a dividend?
A dividend is a distribution of a company’s earnings, paid out to investors. Say you purchase a share of a company, and that company earns a profit one quarter. The company can decide to pay out a part of those profits to shareholders in the form of dividends. That amount is determined by the value of the company’s profits and by how many shares you have. The more shares you have, the higher your dividends are likely to be. (Note: Not all companies pay dividends.)
Dividends are almost always paid out in cash, but occasionally they’re distributed as additional shares of stock. And these payments usually occur four times a year, at the end of every quarter.
What is dividend yield and what does it mean?
When you’re researching the stocks and ETFs that you want to invest in, one element you may want to keep in mind is something called dividend yield. It can help you measure how much cash you’ll get back in dividends for every dollar you invest in the company. Dividend yield is a percentage that is calculated by dividing the annual dividend per share by the price per share.
So, for example, if the annual dividend per share is $2.50 and the price per share is $100, the dividend yield will be 2.5%. The dividend yield of a stock is directly affected by the company’s share price. In fact, there is an inverse relationship. When a company’s stock price goes up, the yield will go down. And when the share price goes down, yield will go up. As of March 2020, the average dividend yield of the S&P 500, the market’s main bellwether, was 2.31%.
The dividend yield can be found on financial websites with stock information. On Stash’s website, you can look at single stocks and ETFs where you’ll be able to find the historical performance of the investment, as well as dividend yield and other information.
How can you use your dividends?
Of course, one way you can use dividends is to take the cash and spend it, or put it towards savings. But another option is to reinvest those dividends. Cash dividend payments tend to be affected more by inflation, whereas stock values can often increase at rates above inflation over time—though that’s not necessarily guaranteed.
Some brokerages, like Stash, offer a plan called DRIP so that you don’t have to manually reinvest dividends. DRIP stands for “dividend reinvestment plan,” and it allows investors to automatically reinvest dividends from the companies in which they invest in, as those dividends are paid out. You can turn on DRIP with Stash and automatically reinvest dividends in your portfolio.
By reinvesting the cash you receive as a dividend, you can also increase the impact of compounding over time. Compounding is one of the most important concepts for new investors. It’s the echo effect that earnings and dividend payments can have on your total investment holdings, allowing them potentially to really add up over time.
Stash and DRIP
If an investment in your Stash receives a dividend, you’ll be notified via email. To turn on DRIP, go to “Invest” in the app and select the gear icon at the top right of the screen.Then select dividend reinvestment and enable the tool. When you receive a dividend from an ETF and you have DRIP turned on, the dividend will automatically be reinvested as either a fractional share or whole share of that ETF, depending on the value of the dividend. The same goes for a stock dividend.
You can start investing, and receiving dividends on those investments,on Stash with any dollar amount today.