What are dividends and how do they work?

Each investor has unique goals for their portfolio, but every investor has one common desire: for their holdings to pay dividends. When a stock pays dividends, that means your investment is reaping tangible benefits, like cash back in your pocket just for holding onto your investment.

That’s just the start of what dividends are and how they work. In fact, there are several kinds of dividends, as well as different strategies for maximizing what you do when you receive them. Knowing what dividends do, how they impact you as an investor, and the best way to pick investments that are primed to deliver dividends can help you make the most out of your money.

How dividends work

Dividends are essentially a portion of a company’s earnings, paid out to shareholders depending on how much equity they hold. This figure is typically determined by the company’s primary owners or board of directors. For publicly traded companies, these announcements typically coincide with a stock’s price, although dividend payments may vary when it comes to holdings in non-publicly traded companies.

Common shareholders will usually get a dividend payment as long as certain criteria are met: they must have held the stock up until the ex-dividend date (i.e. the day before the dividend amount is determined). These dividends may be paid out in different ways, the most common being through cash or additional stock. Cash payouts take the form of a check or direct deposit, whereas dividends that go toward additional stock payment go directly into increasing your shares of that business.

Most companies opt to make regular dividend payments to shareholders, be they monthly, quarterly, or yearly. In other cases, businesses that do not typically release dividends may choose to do so at their discretion as a one-off event. Typically, larger businesses are more likely to offer dividends to their investors, but a company of any size or ownership can opt to pay dividends to investors.

Why dividends are important

Dividend payments are one of the perks of investing in a business. An investor’s main goal might be to see the value of their investment rise, which can take the form of increased stock value as well as (or in lieu of) dividend payments.

Some investors seek opportunities to purchase stock in companies that offer regular dividend payments. In this regard, dividends can create passive income for owners, as they can expect some portion of a company’s profits during a certain period of time. This is in addition to the stock they already own, which may also increase in value on its own. In fact, there are several investing tactics built around dividend-distributing businesses, mostly as a part of a fixed income approach to investments.

Dividends are also important due to their role in helping shareholders obtain additional stock without having to go through the work of purchasing it on their own. Most companies that offer dividend payments also provide an option for reinvesting dividends straight into additional stock purchases, helping investors accrue more stock with the additional funds.

How dividends vary among different types of investments

Publicly traded companies all tend to offer the same dividend payment methods, consisting of cash or reinvestment in stock. There are other less common dividend payment types, such as property dividends (the fair-market value of a physical asset), scrip dividends (promissory notes from a company that has promised—but cannot yet pay—dividends to shareholders), and liquidating dividends (returning capital to shareholders when a business closes).

Mutual funds can also pay dividends, much like direct stock ownership does. Funds that hold a stake in securities that pay dividends or interest payments can pass along the cash to members of the fund.

Dividends are not the sole domain of publicly traded companies, either. Although dividend payments are more rare for privately held companies, or those that are not listed on a stock exchange, they do still happen. Dividends from private companies are paid out to investors in much the same way as public companies distribute cash. A portion of the company’s overall profits gets redistributed among current shareholders based on the amount of ownership they have by way of their investment.

Alternative investing and dividends

Several kinds of alternative investments also offer the potential to earn dividends. Some are designed with dividends as part of their allure, such as real estate investment funds (REITs). REITS offer dividend payments based on the value of the real estate holdings held by the fund. These payments vary depending on the financial success of the underlying holdings.

Agriculture investing is another excellent example of alternative investments that pay dividends. With FarmTogether, you can expect cash distributions on a quarterly or yearly basis, contingent on your investment choices, revenue generated during harvest sales, and lease terms. Plus, you’ll get exclusive access to investment opportunities that stock markets don’t—all while making a difference in the lives of farmers and promoting sustainable agriculture.

The thought of reaping dividends from an investment is an appearing and potentially lucrative benefit to owning a stake in a business. Not every business can offer a steady dividend to investors, however. Finding investments that are designed with reliable dividends in mind is the goal. FarmTogether bakes cash distributions into its investing model, which creates another value proposition for investors beyond the potential to beat market averages with their holdings.

FarmTogether’s innovative investment technology does more than just create dividends for participants. It also scouts for growth opportunities others may overlook, all while providing investors with a suite of reporting tools that can help track assets and measure performance.