Dividends are a distribution of a company’s net 
income 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
