Stock Market Basics: Share Classes and Dividends

Last week I discussed stocks that were income-generating and how they pay dividends, but I didn't explain that these companies sometimes have different levels of shares you can hold. I also didn't explain what a dividend was. I'll use today's post to fill in those gaps.

You know that feeling you get when you find a $5 bill in your pocket or find a $20 bill in your winter coat from last winter? Getting dividends from a company gives me that exact same feeling. Companies declare that a portion of their net income be paid to shareholders on an annual, semi-annual or quarterly basis as a reward for making the investment in the company. So basically a company is paying you to own it. *queue Just Got Paid by Johnny Kemp*

I dont expect some of you 90's babies to know who Johnny Kemp is, but I know you know that there are fast lines for American Airline preferred members? Just like there are a select few who get to board the plane first, there are also preferred shares of companies that get their dividends first. Companies that offer preferred stocks are sometimes called fixed income equities because companies that offer preferred shares are guaranteeing that particular group gets a share of the profits. Common shareholders are at the mercy of the Board of Directors because common share dividends are only announced and paid if the board votes for profits to be distributed to the common shareholder. Hence how preferred shareholders get their dividends before common shareholders.

But not all companies offer preferred shares. For those that do, it is sometimes a good idea to be among the preferred shareholders ranks. Especially for the risk averse that prefer some stability in income and aren't really bothered with voting for the Board of Directors, preferred shares are ideal. However, the majority of the companies on the stock market only offer common shares. Being a shareholder of a company that pays a consistent dividend is sometimes just as good as being a preferred share holder. As a common shareholder you get to vote on who serves on the board of directors, how much they get paid and other pressing issues like what company will serve as the auditor each year.

To find out if a company pays out any kind of dividend, you would need to check out the Income Statement. But because an income statement is probably not the best to include here, I'll simply include how to find out if a company pays a dividend to its common shareholders. I did a company review of Cisco last week so I'll use that as my snapshot this week:

Yahoo Finance CSCO

In conclusion, dividends are good for all portfolios regardless of your risk tolerance level. Be sure to target those when you're first building your portfolio. I pray everyone has a safe trip to and from your Thanksgiving destination!!