When you take the time to invest in the stock market, you want to know that your efforts will be profitable. Given the volatility and risk associated with the stock market, this is never a guarantee. Further complicating matters is the use of techniques such as stock splits. Understanding how a stock split might affect your investments and the dividend growth rate of your stocks can help ease your mind as you make investment decisions.
A dividend is a cash payment of a company's profits that is distributed among shareholders. Typically, dividends are paid out on a quarterly basis, but they may also be paid out annually or semi-annually. Dividends are usually a set price per share. Shareholders can choose to withdraw the dividends or reinvest them in the purchase of more stock.
A stock split is sometimes used to make shares more affordable for investors. When a stock split occurs, the number of shares increases while the individual share price goes down. A stock trading for $100 with 10,000 outstanding shares becomes a $50 stock with 20,000 outstanding shares. Both the net worth of the company and the value of an investor's portfolio remains unchanged. An investor who owned 10 shares at $100 will own 20 shares at $50 following a 2-for-1 stock split.
Dividend Growth Rate
The dividend growth rate is measured as an increase or decrease in the dividends paid out to investors from year to year. Typically, the dividend growth rate is expressed as a percentage. Many investors view regular dividend payouts and healthy dividend growth as a positive sign of a company's financial stability for the long-term.
Stock Splits and Dividend Growth
The correlation between stock splits and dividend growth can vary depending on the company, but many investors see stock splits as a sign of healthy growth. A company might choose to reduce the dividend payout per share and remain on par with the number of shares outstanding after a split, or dividends may increase. Stock analyst Lisa Springer, of the investment website Street Authority, notes that several studies have shown as many as 66 percent of companies raised dividends at the same time or immediately following a stock split.
- Wealth Pilgrim: What Is a Dividend?
- Securities and Exchange Commission: Stock Splits
- Street Authority; Springer, Lisa: 3 Stock Splits that Could Make Big Returns for Investors
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Sara Melone is a mother of three and a graduate of UNH. With prior careers in insurance and finance, photography, as well as certifications in fitness and nutrition, Melone draws directly from past experience and varying interests. She contributes with equal passion to birth journals, investment blogs, and self-help websites.