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Financial Focus

Hereís What You Should Know About Dividends

By Mark Sonnier AAMS, Investment Representative
August 5, 2004

Up until last year, the topic of stock dividends may not have always enthralled investors. But when the new tax laws were enacted, a lot of people started thinking about dividends - and maybe you should too.

Thanks to the tax legislation, dividends are now being taxed at a maximum rate of 15 percent. (The new rate was effective Jan. 1, 2003, and expires on Dec. 31, 2008.) Previously, dividends were taxed at your individual income tax rate.

As a result, companies are issuing more dividends - and some companies that never paid dividends before are now starting to do just that.

Of course, some investors have always known about the value of investing in companies that have a history of paying dividends - and that have increased their dividends over time. Typically, these companies are well-run with a strong interest in rewarding their investors. Furthermore, in addition to paying dividends, many of these stocks offer growth potential.

So, now that dividends are more tax-friendly, you have even more reason to learn more about them.

For starters, dividends can be paid in various forms, but there are two major categories: cash and stock. Cash dividends are the most popular; they are typically paid to stockholders out of the corporationís current earnings or accumulated profits.

For example, suppose you own 100 shares of the fictitious ABC, Inc. Thanks to shrewd management and innovative marketing techniques, ABC has experienced continual growth, and, as a result, the company declares an annual dividend of $4 a share.

You will then earn $400 a year, or $100 paid every quarter. But what if you donít need the income:

Depending on where your shares are held, you may be able to automatically reinvest the dividends back into the company, thereby purchasing more shares.

If ABC, Inc. wants to pay a dividend, but doesnít have the necessary cash for all its shareholders, it could issue stock dividends. So, if ABC issues a dividend of 0.05 new shares for every existing share, you will receive five shares for every 100 shares that you own. Generally stock dividends are tax-free, although you may incur taxes if you sell the shares.

A Dividendís Key Dates As an owner of a stock that pays dividends, you will want to become familiar with some key dates:

  • Declaration date
  • On this date, the board of directors announces to shareholders - and the market as a whole - that the company will pay a dividend.

  • Ex-date (Ex-dividend date)
  • On or after this date, the stock trades without its dividend. If you bought a dividend-paying stock one day before the ex-date, you still get the dividend, if you buy on the ex-date, you wonít. Alternately, if you want to sell a stock but still receive a declared dividend, youíll have to sell on or after the ex-date.

  • Date of record
  • On this date, the company looks at its records to identify its shareholders. If youíre an investor, you must be listed as a "holder of record" to guarantee the right of a dividend payout.

  • Date of payment
  • Hereís when the company mails out the dividend to the holder of record. The date of payment is generally a week or more after the date of record.

At first glance, you might think that you can make a nice profit by buying a stock just before the ex-date. But itís not that simple.

You arenít the only one who knows when the dividend will be paid - everyone knows about it.

And because "the market" sees a dividend payout as a giveaway of profits, it will "punish" the company by lowering its stock price by about the same amount of the dividend. on the ex-date. In other words, forget about those instant gains coming from "well-timed" investments.

Also keep in mind that stocks that are subject to market risks, including the potential loss of principle invested; furthermore, stocks are not fixed-rate investments and may not even distribute dividends.

Still, donít forget about dividends. When you buy high-quality, dividend-paying stocks and place them in a well-diversified portfolio, you can help yourself make progress toward your important, long-term financial goals.

Mark Sonnier is an investment representative for Edward Jones. If you have an investment question or problem you would like Mark to address, you may reach him at (281) 332-8554 or 1025 East Main, Suite 102 in League City.

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