Jargon-Buster
Dividends

Dividend Yield

Active Trader

DIVIDENDS
The easiest way to benefit when "your" company prospers.

Here's the scenario. You did your research. You bought some stock. Now you own the company, or at least part of it.

And the company does well. Sales are up, costs are down, profit increases, and even the stock price is up. You're pleased with your decision to buy the shares. But there's no way to get a payoff from this success, without selling your investment. Or is there?

Well, yes, if you picked a company that pays dividends to its shareholders. Here are two definitions related to dividends.

Dividends

A portion of a company's net income paid to stockholders as a return on their investment. A stock's dividend yield is determined by dividing a company's annual dividend by its current share price. So a stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5%. Dividends are declared or suspended at the discretion of the company's board of directors. A prime benefit of dividends is that once paid, they are money in the bank and provide your only return when stocks are weak. One disadvantage is that dividends are taxed as ordinary income, which, if you're in a high tax bracket, can ramp up your tax bill. See "Dividend/Yield."

 

Dividend yield

A company's annual dividend expressed as a percentage of its current stock price. As a stock's price declines, its dividend yield goes up. So a stock selling for $20 a share with an annual dividend of $1 a share yields an investor 5%. But if the same stock falls to $10 a share, its $1 annual dividend yields 10%. Value investors often see high dividend yields as a sign that a stock is cheaply priced. A high yield also acts as a cushion in a declining market, which is attractive to risk averse investors. The downside is that dividends are taxed as ordinary income. The greater the yield, the more taxes you will have to pay. See "Dividend/Yield."

Our dividend definitions are courtesy
of The Money Show's website,
at http://www.moneyshow.com/

See the Calendar section for more about 
The Money Show.

Active Trader

This definition is pretty easy to find. Just look at the commission rates your brokerage charges.

Many brokers have a discount if you qualify as an active trader, and the general consensus is that an active trader is one who makes 30 or more trades per quarter. Buying a stock, and then selling the same stock, counts as two trades.

And read the fine print to see whether a busy quarter with, say 40 trades, qualifies you for the active trader discount for your trades during a slower quarter, with only, for instance, 22 trades.