Stock represents ownership in a company, with each share of stock representing an equal amount of ownership. One of the primary ways that you can make money from your stock investment is through dividends, which are typically paid out of company earnings. Not all stocks pay dividends, but you can still make money from those stock investments.
Stock dividends typically represent a portion of the company's earnings that the board of directors has decided to pay to the stockholders. Each share of stock is entitled to the same amount of dividends, assuming that dividends are declared. Companies that pay dividends usually pay them on a quarterly basis, although they are not required to do so. Dividends are commonly associated with mature, well-established companies. Companies that have a long history of paying regular quarterly dividends in good as well as bad economic times are sometimes referred to as blue chip companies. Dividends are usually paid in cash, but they may also take other forms, such as additional shares of company stock.
There are a number of reasons why a company's board of directors may choose to not pay dividends even if the company is earning significant profits. The board may feel it is a better use of those funds to put the profits back into the company for research and development, expansion of markets or new product creation. This may help the company to grow, thus increasing the overall value of the entire company. If the market perceives the value of the company to be higher, it may be reflected in the price of the company's stock. You can make money on this stock, even if it does not pay a dividend, by selling your stock at a higher price than you paid for it. This is referred to as a capital gain.
Before you sell your stock for a profit, you should consider the tax ramifications. Any growth in the price of your stock occurs without generating a taxable event as long as you continue to hold the stock, but once you sell your stock, the Internal Revenue Service will get involved. If you hold your stock for at least one year, any gains are taxed at the more advantageous long-term capital gains rate. If you sell your stock before you have owned it for a year any gains will be taxed at the higher ordinary income tax rate.
Covered Call Options
You may be able to generate a stream of current revenue from your non-dividend paying stocks by selling covered call options. A covered call option is considered a conservative investment strategy, but it may not be appropriate for all investors. By selling a call option you agree to sell your shares of stock at a set price upon demand for a specified period of time. In return you receive a premium. If the option period expires without the option being exercised, you get to keep both the premium and your stock. If the option is exercised, you receive the agreed upon price for your stock and you get to keep the premium.