Historically, stocks have provided a good return over the long-term. But maybe you’re hesitant to invest. Maybe you’re not sure what you’re entitled to as an owner of stock. In this post, you’ll learn about three of the main benefits of stock ownership.
When a company makes more money than it spends, it has positive net income. With positive net income, they can do one of two things:
- reinvest the money into the business, or
- pay out the cash to shareholders.
Payments to shareholders are dividends.
4 Important Dividend Dates
When the board of directors declare a dividend payment, that day is known as the date of declaration. The date of record is the day that the owner of stock is entitled to the dividend payment. If shareholders own the stock as of the date of record, they’re entitled to the dividend.
The ex-dividend date is the day the stock market reflects the dividend payment. If a stock is valued at $50, and the company declares a $5 dividend, then the stock should fall to $45 on this day.
Lastly, the date of payment is the actual day that the dividend is paid. Again, it’s the person who owns shares as of the date of record who receives a dividend.
If the company chooses to retain its earnings and invest in future projects rather than pay dividends, the investor receives a return in the form of an increase in the stock price.
Which Is Better – Dividends Or Capital Appreciation?
In 2010, the tax rate on qualified dividends was reduced to 0% for taxpayers in the 10% and 15% ordinary income tax brackets. Taxpayers in the higher tax brackets are taxed at 15%. In 2011, however, all dividends will be taxed as ordinary income.
In 2010, the tax rate on long-term capital gains is also 0% for those in the 10% and 15% income tax brackets. And again, taxpayers in the higher tax brackets are taxed at 15%. In 2011, the long-term capital gains tax rate will be 10% for taxpayers in the 15% tax bracket, and 20% for taxpayers in the higher tax brackets.
Dividends are taxed in the year payment is received, while a capital gain is taxed only when the stock is sold. So from a tax standpoint, a long-term capital gain is preferred over a dividend payment because of the delay in taxation and the lower tax rate.
However, dividends do have their advantages. A company’s dividend payout usually stays consistent over a period of time. If it paid $2 last year, it’s reasonable to expect it to pay $2 or more this year. This gives investors some assurance in the amount of dividend income they’ll receive from their investment. So investors who need current income may be more comfortable with dividends.
Besides receiving dividends and capital appreciation, you also have certain voting rights with stock ownership. These include the right to vote for the company’s board of directors, and the right to vote on issues such as mergers and acquisitions.
There are two different forms of voting. With straight voting, you get one vote per share to any nominee. So if there are four nominees and you own 10 shares, you can only cast a maximum of 10 votes for each nominee, for a total of 40 votes.
With cumulative voting, each share gives you the number of votes equal to the number of board of directors. However, you can cast all your votes for a single nominee. In the same example above, this lets you to cast all 40 votes for a single nominee. This helps protect a minority shareholder’s interests.
These are the three main benefits of stock ownership. Do you invest in individual stocks? Do you prefer dividends or capital gains?
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