Why Do Dividends Fluctuate?

Why Do Dividends Fluctuate?
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It can be an unpleasant surprise when an investment you own pays a smaller dividend than you expected when you bought the stock or fund. If the dividend is larger than you planned, that result brings on a more pleasant emotion. Dividend changes depend on financial results and the dividend policy of the stock or fund.

Stock Dividends

The dividends paid on a stock are a portion of the profits the company has earned. Investors need to understand that no common stock dividend is guaranteed. For each dividend payment, the company's board of directors decides on the amount that will be paid to shareholders. If the board decides it is best for the company, the decision can be to increase, decrease or not pay the next regular dividend. However, it is rare that a company will stop paying if it has a history of regular dividend payments.

Company Dividend Policies

How much the dividend of a stock fluctuates depends on the dividend policy of the company. Some companies try to maintain a steady dividend payout, with regular increases as profits rise. These are the companies and stocks for investors who want to count on dividend payments. Other companies have dividend policies where the amount depends on the profits earned and often these companies are in a type of business where market conditions are seasonal or dependent on outside factors the company cannot control. As a result the dividends from this type of company can change significantly from payment to payment.

Fund Dividends

The different fund types -- mutual funds, closed-end funds and exchange-traded funds -- are all required to pass on portfolio dividend and interest earnings to investors as fund dividends. Some funds, especially bond funds, try to maintain a stable dividend policy and only change the payout rate once a year based on the expected portfolio income. Other funds will pay out the total portfolio earnings, which can fluctuate between the dividend payment dates, resulting in fluctuating dividends for investors.

Research Before Investing

Before you invest in a stock or fund because the dividend yield looks attractive, it's a good idea to research the dividend history of the investment. If the company has a long history of steady dividend payments, then odds are good that the dividend trend will continue. If you find a fluctuating history, be prepared for higher or lower dividends in the future. If you're going after high-yield stocks, consider diversifying into several companies from varying market sectors. Then if one stock announces a lower dividend, the effect on your portfolio income is minimized.