Equity Ownership 

When a corporation sells shares of its own stock, these represent ownership in the company. In other words, a purchaser of even just one share of stock in a company is an owner of the company, albeit a very small owner. As a company prospers, it has the option to reinvest profits back into the business. A shareholder benefits from this investment of profits as the company grows and the value of its shares of stock increase.

Another way for a shareholder to benefit from a company’s profits is to receive a portion of the profits as a direct payment from the company in the form of a payment called a dividend.

Entitlement to dividends 

When a corporation announces a decision to pay a dividend to shareholders instead of reinvesting all profits back into the business, this is known as a declaration date. But not all shareholders are entitled to receive a declared dividend. Only the owners of shares issued prior to a date, known as the ex-dividend date, may receive the declared dividend. People who purchased their shares after the ex-dividend date can participate in future dividend declarations, but are not entitled to the current one.

Using dividends for retirement income

Some companies have a history of declaring dividends on a regular basis. For example, Coca-Cola has a long history of paying dividends to its shareholders. Its dividends have steadily increased since 1962. A stock with a history of increasing the amount of its dividends from year to year might be a good source of income. Stockholders have a choice of receiving the dividend as a quarterly payment, or in some cases, to use the dividends to purchase additional shares of stock through a dividend reinvestment plan.

Finding dividend-paying stocks 

Your financial planner might be able to recommend companies with a history of paying dividends and those companies whose dividends have increased each year as a hedge against inflation. Your advisor might also recommend dividend income funds that invest in stocks with a history of paying dividends. The dividends collected by the income fund are distributed to the fund’s investors. Some funds offer a dividend reinvestment plan for those individuals who do not need or want the income payment.