The stock of a corporation, also known as capital stock, constitutes the equity stake of the corporation’s owners, i.e. the shareholders. The stock of a corporation is partitioned into shares, with each share representing ownership in the business. So, as soon as you purchase one share in a corporation, you become one of the owners of that corporation. For most share types, this will also mean that you have voting rights. Publicly-traded corporations tend to have a multitude of owners (shareholders) and most of them do not even attempt to influence how the corporation is run, neither by voting or by other means.
Basically, there are two main ways of profiting from shares:
- Buying a share, and then selling it for a higher price.
- Buying a share, and receiving dividends from the corporation. Dividends are a way for a corporation to distribute part of its profits to the owners. In many jurisdictions, dividends receive preferential tax treatment compared to most other types of income, e.g. profits made from selling shares.
Of course, for the savvy trader, there are other methods available as well, such as using your shares as a basis for creating stock options, but we will not go further into that in this short article.
Different types of shares in a stock company
Shares of common stock
This is the “normal” type of shares in stock companies. There are a lot of stock companies that only have common stock. In most jurisdictions, shares of common stock must come with voting rights.
Shares of preferred stock
A share of preferred stock, also known as a preference share, gives its holder a right to receive dividend payments before any dividends may be distributed to the holders of common shares. In most jurisdictions where preference shares exist, it is even legal for a stock company to make a dividend payment to preference shareholders only, without following up with a dividend payment to the holders of common shares.
As a trade-off, preference shares will typically not give the holder any voting rights. In such companies, any decisions regarding dividend payments are therefore voted on by common shareholders only.
If a company goes into liquidation, the holder of a preference share is entitled to preferential treatment over the holder of a common share, but not over creditors. In many cases, this preferential treatment doesn’t really give the preference shareholder anything of value, since a company that goes into liquidation is often so burdened by debt that there is absolutely nothing left to distribute to the shareholders once the creditors have been paid.
Convertible shares of preferred stock
A convertible share of preferred stock gives the holder the right, but not the obligation, to convert the preference share into a predetermined number of common shares. Usually, this conversion can only take place after a certain date, which is specified by the issuing corporation when the convertible shares of preferred stock are created.
As mentioned above, one way of making money on stocks is to receive stock dividends. When a company is profitable, shareholders with voting rights can vote to distribute part of the profits to company’s shareholders in the form of dividends. Holders of preference shares are entitled to receive dividends before holders of common shares receive any (see above).
Stock dividends are usually cash, but in theory, they could be anything of value, e.g. gold, silver or spices.
Dividends are paid per share, which means that the more shares you have in the company, the larger the dividend payment. Example: You own 400 common shares in Company TTTT. You and the other shareholders decide by vote to make a dividend payment of $4 per common share. There are no preference shares. 400 shares x $4 = $1,600. You will receive a $1,600 dividend payment.
Finding dividend paying companies to invest in
A stock company must be profitable to pay out dividends, but there are many stock companies that do not pay dividends even tough they are making a profit. Instead, the profits are retained within the company, e.g. to help fund research and development, to open up new branches, to acquire other companies, and so on.
Generally speaking, it is well-established companies that will make dividend payments. A young start-up company is much more likely to use its profits to grow and expand the company, rather than pay dividends to the shareholders.
If you want to invest in shares with the hope of receiving dividends, ideally look for well-established companies with a strong history of paying dividends. Each new payment of dividends must, of course, be approved by the shareholders, but a company that has paid dividends every year for some years is likely to continue to pay dividends in the next few years, provided of course that the company remains profitable.
There are certain sectors where you are much more likely to encounter dividend-paying companies. If you are looking to invest in dividend-paying companies, we suggest you start your search in any of these sectors:
- Oil and gas
- Basic materials
- Real estate
- Bank and financial
- Health care and pharmaceuticals
High Dividend Stocks
Below we will list a few stocks that offer high dividends at the time this article is written.
Kindred group is an online gambling company that runs a number of popular online casinos, poker sites, and online sports betting sites. The most popular and well-known gaming site operated by Kindred Group is Unibet. Unibet is a very well regarded online casino that is present in most European markets. Kindred is a mature well-managed company that pay high dividends. The dividend is currently 7.67%. The stock is traded on NASDAQ Nordic. Kindred Group license games from a number if different developers. Among them, you find another great dividend stock, NetEntertainment.
NetEntertainment is a leading developer of casino games for online casinos. Their software is used by a large number of casinos including Kindred Groups Unibet mentioned above, The developer has developed a large percentage of all popular online casino slots. Among the slots, they have developed you will find Mega Fortune, Twin $pin, Jack Hammer, South Park, and many others. You can read more about the casino games provided by NetEnt here. The link also allows you to see a list of other casinos that use software from NetEntertainment. NetEntertainment is traded on NASDAQ Nordic and pays 6.14 % dividend.
Magellan Midstream Partners
Magellan Midstream Partners is a company that is very well regarded in the shipping industry. They specialize in shipping oil and gas. Two products that require specialized vehicles to be transported and that has a high barrier of entry. The demand for their services is relatively stable. The company is very well positioned on the market and pays 6.7% dividend. This company is sensitive to lower demand for oil, and there is limited space for it to grow within its current industry.