What Are Dividends and How Do You Receive Them?
If you’re starting to invest—or simply exploring how stocks and financial assets work—you’ve probably come across the term dividends. For many investors interested in generating passive income, understanding dividends is essential.
In this article, we’ll break down in simple terms what dividends are, how they work, what types exist, and how you can receive them depending on how and where you invest.
What Are Dividends?
Dividends are a portion of a company’s profits that is distributed to its shareholders. It’s one of the ways companies reward investors for supporting their business.
Not all companies pay dividends, but many established ones—like Apple, Coca-Cola, or Microsoft—do so regularly.
How Are Dividends Paid?
When a company decides to share its profits with shareholders, it typically does so in one of two ways:
- Cash Dividends: A set amount of money is paid to you for each share you own.
- Stock Dividends: Instead of cash, you’re given additional shares.
Dividends are most commonly paid on a quarterly basis, though some companies distribute them semi-annually or annually.
Who Is Eligible to Receive Dividends?
To receive a dividend, you must own the stock before a specific date called the record date (or “ex-dividend date”). If you buy the stock after that date, you won’t receive the next dividend payment.
This rule applies whether you’re investing directly in U.S. or international stocks—or using investment vehicles that represent them, such as depositary receipts or local equivalents.
How Are Dividends Received?
The method depends on how and where you invest:
1. Through Local Depositary Receipts (e.g., ADRs or similar instruments)
If you invest in foreign companies via depositary receipts traded on your local exchange, you can still receive dividends:
- Payouts are typically converted into your local currency.
- Payments may be delayed by a few business days after the company distributes them.
- No need to have an overseas brokerage account.
2. Through International Brokers
If you invest directly through a global brokerage account (like those based in the U.S.), your dividends are credited in U.S. dollars to your account:
- A 30% tax withholding may apply for non-U.S. residents.
- Many brokers allow you to submit Form W-8BEN to potentially reduce the withholding to 10%, depending on your country’s tax treaty with the U.S.
What to Look for in Dividend Stocks
Not all dividend-paying stocks are created equal. If you’re building a dividend-focused strategy, consider these factors:
- Dividend Yield: The percentage of a company’s stock price paid out annually as dividends.
- Payment History: Some companies, like Johnson & Johnson, have paid consistent dividends for decades.
- Payout Sustainability: A high yield isn’t always a good sign—especially if the company is under financial stress.
- Sector Stability: Industries like utilities, consumer staples, and energy tend to have more stable dividend payers.
Are Dividends Taxable?
Yes, in most countries, dividend income is subject to tax—especially when received from foreign investments. If you’re investing internationally, be aware of any local tax implications, which may include income tax or capital gains tax depending on how dividends are classified.
Always consult a tax advisor or financial professional to understand how dividends affect your specific tax situation.
Final Thoughts
Dividends are one of the most effective ways to generate passive income from your investments. Whether you’re investing in global companies through a local exchange or managing a portfolio via an international broker, understanding how dividend payments work helps you make more informed, confident decisions.
Interested in exploring global investment opportunities?
Download the Inter app to discover upcoming tools for managing U.S. dollar investments and accessing international markets.
You can also join our Forum community and follow us on Instagram for educational content, dividend strategies, and financial tips for all kinds of investors.
