How Do Dividends Work When You Own Fractional Shares?

When publicly traded companies make money, they can either choose to reinvest their profits in the business or share it with stockholders. When they opt for the latter, it results in dividend payments.

Companies aren't required to pay dividends. A given business could make a series of dividend payments and then halt that practice. On the flipside, there are some companies that not only pay dividends consistently, but raise them over time. In fact, there are several companies that have increased their dividends for at least 25 years in a row.

You may be interested in holding dividend stocks in your brokerage account. But what if your brokerage allows you to buy shares of stock on a fractional basis?

Rest assured that even if you only own shares of stock on a fractional basis, you can still collect dividend payments. Your payments, however, will be calculated proportionately.

Dividends provide extra money to invest or enjoy

The great thing about dividend income is that it's extra income. You can cash out your dividends if you choose and spend that money -- whether on fun things, like concert tickets, or essential bills, like your mortgage. But if you don't need the money, it's generally a good idea to reinvest your dividends so you can grow your portfolio even more. Many brokerage accounts allow you to set up an automatic dividend reinvestment plan so the process is seamless.

If you own shares of stock on a fractional basis, you'll receive a proportionate share of dividends when they're paid. So, let's say a given company pays a $20 quarterly dividend per share of stock. If you own half of a share of that company, you'll get a $10 payment when dividends are issued. If you own one-fifth of a share, you'll get a $4 payment. But either way, you'll get your money.

Is it worth investing in dividend stocks?

With dividend stocks, you can make money two ways -- via those dividend payments, and via share price appreciation over time. It can definitely be worth it to invest in dividend stocks if the businesses behind them are strong and have a lot of growth potential. But it's generally not a great idea to buy stocks just to collect the dividends they're paying.

For one thing, companies can always choose to cut their dividends or stop paying them over time. Also, a higher dividend is not necessarily indicative of a company's financial strength.

In fact, you could make the argument that dividend stocks aren't poised to grow as much as non-dividend-paying stocks, because those companies are giving out money to shareholders rather than using it to grow the business. This isn't always the case, and plenty of companies that pay dividends do experience their share of growth, but it's a fair point.

As a general rule, it's important to research any individual stock you're thinking of owning. So if you're drawn to a larger dividend, dig into the company's financials and make sure it really is a good buy.

All told, dividend stocks could be a nice addition to your portfolio. This holds true whether you buy shares in full or invest on a fractional basis.