What is a dividend?

A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it can pay a proportion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business (called retained earnings). Dividends can be issued in various forms, such as cash payments, stocks, or any other form. A company's dividend is decided by its board of directors and it requires the shareholders' approval. However, a company doesn't need to pay dividends. 

The dividend received by a shareholder is considered as income of the shareholder and may be subject to income tax. The tax treatment of this income varies considerably between jurisdictions. The corporation does not receive a tax deduction for the dividends it pays.

Question 1：After getting to know what dividend is, what is your opinion on whether or not it is good to received dividends?

This is a controversial topic. Some people prefer receiving a steady stream of dividends and will look for dividend-paying stocks to invest in (e.g. $Procter & Gamble Co(PG.US)$, $AT&T Inc(T.US)$, $Realty Income Corp(O.US)$, $Johnson & Johnson(JNJ.US)$, etc). Others who prefer growth stocks will look for non-dividend paying stocks to invest in (e.g. $ALPHABET INC-CL A(GOOGL.US)$, $Amazon.Com Inc(AMZN.US)$, $Facebook Inc(FB.US)$, $Berkshire Hathaway Inc.(BRK.A.US)$, etc).

Therefore, we will look at both sides and their reasoning behind it. And you will be the judge on which side you agree more.

Pros on dividend payments

For a mature company with stable earnings that don't need to reinvest as much in itself, they are more likely to issue dividends.

Some investors see it as a way of showing a company's strength and a sign that management has positive expectations for future earnings.

By doing so, it will make the stock more attractive, which will result in a greater demand for its stock. This will ultimately lead to increases in its price. It is also worth mentioning that paying dividends is one of the simplest ways for companies to foster goodwill among their shareholders, drive demand for their stock, and communicate financial well-being and shareholder value.

Cons on dividend payments

For a company that expands quickly, they typically will not make dividend payments. Because during pivotal growth stages, it's fiscally shrewder to re-invest the cashback into operations. But even well-established companies often reinvest their earnings to fund new projects, acquire other companies, or pay debts. All of these activities tend to spike share price.

Not paying dividends is also more beneficial to investors from a tax perspective:

• Non-qualified dividends are taxable to investors as ordinary income, which means an investor's tax rate on dividends is the same as their marginal tax rate.

• Marginal tax rates can be as high as 37%—as of 2020.7

• For qualified dividends, the tax rate is either 0%, 15%, or 20%, depending on the marginal income tax bracket that the investor falls under.

• The capital gains on the sale of appreciated stock can have a lower, long-term capital gains tax rate—typically up to 20% as of 2019—if the investor has held the stock for more than a year.

It is worth mentioning that the god of investment, Warren Buffett is a strong supporter of not paying dividends. He's Berkshire Hathaway is famous for not making dividend payments. In his opinion, a company should always consider reinvestment possibilities first and by growing the company with reinvesting, shareholders will be able to benefit more.

Question 2：So after all this information, what do you think of dividends?  Did your answer change since Question 1? Please comment below :D

Instructions on how to check dividend payments on Moomoo

If you would like to check a stock's dividend payments made, follow the steps below: