There are two ways of making money from investments in the stock market.  You can buy shares and hopefully sell them later at a profit—what is known as capital appreciation. You can also buy shares of a stock that pay dividends, regular distributions of a company’s earnings.

Companies can pay out dividends monthly, quarterly, semi-annually, or annually. The payment schedule is called the dividend frequency. Many U.S. companies use a quarterly dividend frequency.  Foreign companies typically pay dividends once or twice a year.

You might also invest in mutual funds or exchange-traded funds (ETFs) that include dividend-paying stocks in their portfolio. Such funds are required to pay out dividends at least once a year.

Many shareholders choose to reinvest quarterly dividends by purchasing more stock, which can be a powerful compound accelerator over time. Imagine you started with savings of $1,000 and added $50 a month for 10 years with an annual return of 5.25%.At the end of the decade you’d have contributed $7,000 but you couldhave saved about $9,3001.  (You can use this calculator to see this for yourself.) Regularly reinvesting dividends can similarly increase compounding beyond the average rate of return.

Some brokerages and apps allow you to automatically reinvest your dividends with a dividend reinvestment plan (DRIP). If you invest with Stash, you can turn on DRIP and invest dividends automatically2.

Some investors seek regular monthly income (which is taxable) from dividends. If you’re looking for regular income from your investments, you might want to look for companies that use a monthly dividend frequency. 

How dividends work

Dividends are shares of a company’s profits that are paid out to shareholders as a reward for investing in the company—or as an incentive to attract new investors. Worldwide, companies paid nearly $1.5 trillion in dividends in 2019.

Not all companies pay dividends, and companies are free to increase, decrease or eliminate dividends, which are set by the board of directors and approved by shareholder vote.

Stocks that pay dividends often come from more established companies with predictable revenue streams—such as oil and gas producers, automakers, pharmaceutical, and consumer goods businesses. Such companies, while often solidly profitable, aren’t growing very fast. That means their stock doesn’t gain value rapidly. To attract investors they need to ice the cake with the promise of dividends.

By contrast, rapidly growing companies like tech startups don’t have a lot of spare cash to pay dividends; they need to invest their profits into growing the business. In turn, shareholders of those companies hope to make money when the stock price spikes, rather than from regular dividends. Some companies don’t pay dividends until they become dependably profitable. Most investors like to own a diverse mix of stocks that earn dividends and ones that don’t.  

Dividend amounts vary depending on such factors as a company’s performance, cash needs, and the price of the stock itself. Investors often use a ratio called the dividend yield, which is the annual dividend per share divided by the share price. Many financial news websites, including Stash,  track dividend yields for hundreds of stocks. Remember that a high dividend doesn’t always indicate company strength; some companies decrease dividends in order to invest in new business ventures that will ultimately pay shareholders more as the stock value rises.

Dividends and taxes

Remember, whether you reinvest your dividends or not, you’ll likely have to pay taxes on dividend earnings held in a standard brokerage account, at the same rate as your income is taxed. So if your income is taxed at 24%, dividends you earn are also taxed at that rate. 

An exception is something called a qualified dividend, on which you’d pay the lower long-term capital gain rate. Generally speaking, a qualified dividend is for a stock that you’ve held for a period of 60 to 90 days, usually within a specified window of time counted from something called the ex-dividend date. 

Under current law, qualified dividends are taxed at a 20%, 15%, or 0% rate, depending on your tax bracket. 

Important dates to know

If you’re investing in a stock that pays dividends, you should be aware of the company’s dividend calendar. The dividend calendar includes four important dates for every dividend payment.

  • The declaration date is when a company announces the amount of its next dividend payment, pending shareholder approval.
  • The ex-dividend date is the day when new purchases of the stock are not eligible for the dividend on the next payment date.
  • The record date is essentially a cut-off day—everybody who owns stock on the record date qualifies for the dividend. Note that it’s not the same as the ex-dividend date. Since a stock purchase technically takes two business days in the United States, the record date can actually be one calendar day after the ex-dividend date.
  • Finally, the payment date is when the dividend is actually paid out.

Brokerages and investment management companies publish online calendars of dividend payouts and dates for hundreds of companies. You can also find online calendars on the New York Stock Exchange and Nasdaq websites.