Dividends - Making money from your stocks, without selling them (Also, stock splits and why they're good)

If you've ever owned stock, you're probably familiar with the basic concept of a dividend. Stocks pay dividends as a means of sharing profits with shareholders. Without dividends, you must actually sell your shares of a stock to receive any benefit.

What you may not realize is that there are multiple forms of dividends. A cash dividend is the type most people are familiar with - it is a cash amount, usually payed on a per-share basis. In other words, a dividend of 12 cents per share will get you $12.00 if you own one hundred shares. Dividends may also be in the "percentage cash" form. This means that you multiply the percentage by the total par value of your shares. For example, if you have 300 shares of $1 par value, and the stock is paying 10% dividends, you will get $300 * 10% = $30.00. The par value of a stock does not mean the true value of it. Par value is a fixed number, listed on stock certificates, and does not fluctuate when the price of the stock does. (That is, with the exception of stock splits; see below.)

The other major form of dividend is the stock dividend. A stock dividend is payed in the form of more shares in a company. It increases the number of shares held, but the percentage of the company owned does not change. This serves to reduce the price of individual shares, possibly tempting new investors who were previously discouraged by high prices.

What about stock splits?

While not a form of dividend, the stock split increases the number of shares available. It does not change the total value of the stock, but it does change the individual par values and, theoretically, the market price. For example, let's assume you own 50 shares in a company which has a 2-for-1 split. Each share previously had a par value of $1. Now, you will have 100 shares, of half the par value. If the market price was previously $10 per share, it will probably be $5 now. (This is not certain, however; the company can only control the par value.)

You may notice the similarity to stock dividends - your percentage of the shares does not change, nor does its value. Stock splits take place for much the same reasons as stock dividends - to reduce the individual price of a share and lead to new investors.

Stock splits benefit shareholders in another way. Each new increase in the price of a share has extra benefit. For example, if you have 100 shares, each time the price of a share rises 1/4, you make 25¢. After a split, you will have 200 shares, and each time the price of a share rises 1/4, you will make 50¢.

You can see if a stock has split in the last year by looking for an s in the margin of the stock listing.