Dividend questions

Q:

What’s a dividend? — N.R., Glens Falls, N.Y.

A:

When a company pays out part of its earnings to shareholders, that’s a dividend.

Imagine that Monster Gene Inc. (ticker: FSTEIN) earns $4 per share and pays out $1 per share annually — $0.25 per quarter. So someone owning, say, 100 shares will get $25 each quarter and $100 over the year. Healthy and growing dividend-paying companies tend to increase their payouts over time, too, so in the future, that shareholder could collect $150 and then $200 and more each year. The share price of the stock is likely to increase over time, too.

A related term you’ll hear often is the “dividend yield.” This is a company’s annual dividend amount divided by its current share price. So if Monster Gene was priced at $20 per share, divide $1 by $20 to get 0.05, or a 5 percent yield.

Companies can use their earnings in other ways than by paying dividends. They may, for instance, pay down debt or buy back shares of their stock. Companies trying to grow rapidly frequently won’t pay dividends, as they prefer to spend all available funds to further their growth — perhaps by hiring more people or building more factories.

Q:

Is it better to sell a stock that has lost value or one that’s gained value? — P.T., Bellevue, Wash.

A:

How a stock has done in the past doesn’t matter that much. You should care most about how it will perform in the future. It can be helpful to try to rank your holdings by how confident you are in their financial health and growth potential — and then, if you need to sell shares, start with the ones at the bottom.