How Dividends Work

If you are investing online and have a taxable brokerage account, you need to understand dividends. Dividends are paid based on how many shares you own. If a company declares a $1 per share dividend and you own 100 shares, you will receive $100. To help compare the sizes of dividends, investors generally talk about the dividend yield.

You can calculate a stock’s dividend yield by dividing the annual dividend by the stock’s price. But you can also get it from almost every financial Web site. Reuters, for example, has an extensive database of dividend information. To get a company’s dividend yield using the Reuters Web site, follow these steps:

  1. Go to Reuters’ stocks main page.

  2. Enter a ticker symbol in the View Overview For blank.

  3. Select the Financials radio button to the right of the red search button, and then click the red search button.

    In the new page that appears, scroll down to the dividends section. In the Dividends table, (using General Electric as an example), you can see what a company’s dividend yield is now and what it was on average over the past five years. You can also see what kind of dividend yields other companies in the industry pay.

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The following table shows what kinds of dividends are typical in various industries.

Dividends That Industries Pay
Industry Five-Year Average Dividend Yield, %
Real estate investment trusts 3.0
Multiline utilities (electric power and natural gas) 3.1
Major drugs 1.6
Conglomerates 1.6
Software 2.0

Source: www.reuters.com

Some online brokers and companies that sell their shares to investors directly allow you to use dividends paid by a stock to buy more shares of the stock. These programs are called dividend reinvestment plans (DRIPs).

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