Dividends are a distribution of a company’s net dividendsincome to shareholders. When a company generates a profit, it can choose to 1) reinvest the profit in the business as retained earnings or 2) distribute the profit to investors as a dividend. Growth oriented companies, which may be start-ups or in new industries, will generally retain 100% of their profits to feed that growth. Companies in more mature businesses often reward shareholders by paying a dividend. Mature companies in mature industries are more likely to pay a dividend. Examples of mature companies that pay dividends include AT&T, Verizon, Apple and Microsoft.

Certain investors may prefer to receive dividends. For example, a retired couple might seek to invest in a dividend-paying stock as a regular source of income. Or, if interest rates are low, bond investors might move some of their cash into equities, chasing the higher return.

On the other hand, wealthy investors may shun dividend earning stocks, to avoid generating a tax liability on the dividend received.

Knopman Notes:
Candidates should be aware of dividends as a way for clients to earn current income. This can be done through investments in preferred stock, or common stock of companies that pay dividends. Importantly, dividends are never guaranteed, so investors and clients must be aware that the dividends can be skipped at the discretion of the issuer’s board of directors.

Relevant Exams:
Series 7, Series 24, Series 63, Series 65, Series 66, Series 79, Series 86, Series 87

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Written by Dave Meshkov
Dave's mission (and job: Managing Director of Course Design) is to make FINRA exam training engaging, approachable, and dare he even say, enjoyable. Having trained and coached over ten thousand students to exam success he knows how to present complex subjects in memorable and understandable ways. Prior to joining Knopman Marks in 2011, Dave practiced bankruptcy law at Weil, Gotshal & Manages and served as a law clerk in a the Southern District of New York Bankruptcy Court working on the General Motors and Lehman Brothers bankruptcies. Building on his legal expertise and training allows him to keep all our courses updated with the latest legislative and rule-making changes. Dave currently trains for the Securities Industry Essentials (SIE) exam and the Top-Off Series 6, 7, 24, 57, 63, 65, 66, 79, 86, 87, and 99 exams. He also delivers executive one-on-one training and shares his passion for learning outside of work as a ski instructor and yoga teacher. Dave graduated magna cum laude from Fordham Law School, and cum laude with a BA from the University of Pennsylvania.