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What Is A Dividend? Plus The 5 Best Dividend Paying Stocks

In the simplest terms, a dividend is your share of a company's profits. They are typically paid out quarterly. Some companies, such as those in the U.K., pay a semiannual dividend to shareholders.

It's important to note that not all companies make these payments. High-growth tech stocks and biotechs often forgo these payouts, instead reinvesting in research and development to enhance existing products or create new products that generate big sales.

What Is A Dividend?

To understand a dividend, you must first understand why investors buy stocks. Shareholders of a company are guaranteed two rights. They can help elect a board of directors to run a company, and they are entitled to a share of that company's profits.

So, if a company declares a 25-cent quarterly dividend and you own 100 shares of that company, you will receive a $25 payment. If that payment remains consistent for a year, you would be paid $100 just for owning those 100 shares.

There are several types of payouts: Ordinary, stock and special/extraordinary. Ordinary is the most common, according to online brokerage ETrade Financial (ETFC). Some companies may conserve cash by making payments in the form of additional shares of stock.

In uncommon cases, a company can make a special or extraordinary payout. During unusually profitable years, companies can announce a special, one-time payment to distribute additional cash or stock.

How Does A Dividend Work?

  1. You buy a certain number of a company's shares. For example, let's say you own 100 shares of Chevron (CVX) stock.
  2. The company announces it will pay out a quarterly dividend. In the case of Chevron, the oil giant said on Jan. 30 it would hand out $1.19 per share to all holders of common stock.
  3. To determine your share of profits, multiply the dividend by the number of shares you own. In this example, you would receive a quarterly payment of $119.
  4. A company will generally send a check, or make a payment to your brokerage account.
  5. Some companies offer what's called a dividend reinvestment program, or DRIP, according to TD Ameritrade (AMTD). This allows you to reinvest the payment back into the company, sometimes at a discount.

When Does A Company Make A Payout?

There are several important dates to keep in mind when determining whether to buy a dividend stock. In the Chevron case, the company said it would make the payment to shareholders of record as of Feb. 15. That means anyone who owned the stock as of that date received a payout.

ETrade notes the record date is important for stock buyers and sellers alike. The ex-dividend date is a business day before the record date. Then, an investor can buy a stock but won't receive the most recent payout. To compensate for this, the cost to buy a share is usually reduced.

On the flip side, if you're looking to sell — but still want to get the most recent quarterly payout — you must wait until the ex-dividend date to do so.

How Do You Calculate The Yield?

You can calculate the annualized dividend yield by dividing the annual payout by the stock price. So, if Chevron's quarterly payout of $1.19 remains consistent for all of 2019, the company will end up paying $4.76 per share in dividends for the year.

Chevron stock trades around 118. Chevron has an annualized yield of around 4%. That far exceeds the nearly 1.9% yield for the S&P 500, as noted each day in the General Market Indicator Charts feature at Investors.com.

Understanding a dividend's yield helps to level the playing field to account for high-dollar stock prices or payouts of unusually high dividends.

Dividend.com says the highest-yielding dividends often come from basic materials stocks — like oil and gas, metals, chemicals, construction and wood/paper products — followed by financial stocks. On average, they yield 4.96% and 4.18%, respectively.

It's important to keep an eye on unusually high yields as that can be a marker the payout isn't sustainable.

What Are The Best-Paying Dividends?

Keeping in mind the rule of yields, the best-paying dividends as of April 23 included oil and gas companies Enbridge (ENB) and Enterprise Products Partners (EPD) and tobacco firm Altria Group (MO). The trio is at the top of Investor's Business Daily's Dividend Leaders list.

Those three companies have annual dividend growth rates of 17%, 13% and 5%, respectively. Chevron is No. 11 on the list with a recent yield of 3.81% and a growth rate of 1%.

By yield, the best-paying dividends include:

  1. Enterprise Products Partners — 6%
  2. Enbridge — 5.9%
  3. Altria — 5.8%
  4. Philip Morris (PM) — 5.4%
  5. TransCanada (TRP) — 4.7%

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