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Stocks 408: The Case for Dividends

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1.
With a dividend reinvestment plan (DRIP) for stocks, what happens to reinvested dividends?
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They purchase additional shares of stock for you. DRIPs will actually buy additional shares for you; this is a way of investing on autopilot.
2.
Ultimately, dividends are behind capital gains.
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True. The underlying reason for investors bidding up the prices of stocks is that they are valuing the dividends that the company will pay, even if those dividends do not materialize for a while.
3.
Which of the following is not a benefit of a DRIP?
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It pays double the regular dividend. DRIPs encourage long-term investing, and because the dividends are reinvesting regularly, investors may benefit from dollar-cost averaging. However, DRIPs respect the existing dividend rates.
4.
When are taxes on an investment's dividends normally due?
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In the year that the dividends occur. Dividends are immediately taxable. If they are earned in a tax-deferred account, then they will be due years in the future, but this is not the normal situation.
5.
Why is an economic moat important for a dividend-paying firm?
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Both of the above. Moats are critical both for the sustainability of a dividend and for its growth potential.