All About Dividends
The term dividends is synonymous with stock ownership, however, many investors do not know what a dividend really is and how dividends are paid.
Here we will examine dividends and discuss exactly what a dividend is, how dividends are paid and other issues related to dividends.
What Exactly Is a Dividend?
A dividend is simply a payment made by a corporation to its shareholders.
Dividends are normally paid to stock holders in cash, otherwise referred to as "cash dividends" but may also be paid by the distribution of additional shares to stockholders.
The term dividend comes from the Latin dividendum, which means "thing to be divided."
Dividends were first paid out by the Dutch East India Company in the 1600s-and have been paid out to investors over the 400 years since that time and are still paid out today.
Why Do Companies Pay Dividends?
When companies are looking to raise cash, they sell shares, or stock.
This cash may be used for numerous things including but not limited to: equipment purchase, various patent or legal rights purchases, debt payments, property acquisitions and many other potential uses.
Many modern day companies would not have been able to really get off the ground or expand without selling shares in the company to the public to raise money.
A dividend is a payment made by the company to the shareholder for investing his or her money in the company.
One could even look at a dividend as a reward of sorts-a reward for stock ownership in the company.
In addition, a company that pays an attractive dividend may potentially attract more investors who are interested in earning dividends.
How Do Investors Collect Dividends?
In order to collect a dividend from a company, there are certain requirements that apply.
An investor must look into the ex-dividend dates to make sure that they own shares prior to this date to be eligible for the next dividend payment.
Assuming an investor is eligible to collect the dividends, then most often these cash dividends are deposited directly into the investor's brokerage account.
In other cases, investors may choose to have dividend payments automatically used to purchase more shares.
In addition, one may elect to have dividend payments mailed in the form of a check.
What Exactly Is The Ex-Dividend Date?
The ex-dividend date is simply a date on which the buying and selling of the shares will no longer come with the right to the dividend.
In other words, one must own the shares prior to this date to receive the next dividend payment.
If one sells their shares prior to this date, then he or she gives up their right to earn the dividend.
Following the ex-dividend date, anyone who sells their shares is still entitled to the dividend, while anyone who now buys the shares will not be entitled to the dividend.
It is worth noting that a stock's price will usually decrease by the amount of the dividend to be paid on the ex-dividend date.
This is simply because the company will be paying out cash (assets) to investors and therefore stock traders and investors account for that in the share price.
There are three other dates involved in a company paying dividends.
These dates are:
The record date simply refers to the date on which registered owners of the stock are recorded and will thus receive a dividend.
Recording, or stock ownership registration, is typically automatic.
The payment date is exactly what it sounds like-the date on which dividend payments are mailed out to investors or deposited into brokerage accounts.
The declaration date is the date on which a company's board of directors will announce what the next dividend payment will be.
In regards to dividend payments, most companies pay out dividends each quarter.
Some companies, however, pay dividends annually, semi-annually, or even monthly.
The company will decide its own payout dates and schedule.
In addition, companies will at times make special dividend payments.
These payments are separate from the scheduled dividend payments and are not factored into the dividend yield.
Companies may elect to make special dividend payments following exceptionally strong earnings or to make changes to its financial structure.
What Does a Dividend Payment Look Like?
Dividend payments come in different sizes and frequencies, however, the basic premise remains the same.
Let's suppose that stock RRR pays an annual dividend of $.20 per share, and pays dividends to shareholders on a quarterly basis.
Investor Bob owns 1000 shares of RRR.
Each quarter, therefore, Bob is entitled to a dividend payment of $.05 per share ( $.20 /4 quarters=$.05)
If Bob has 1000 shares, then $.05 x 1000 would equal a quarterly dividend payment of $50 that could be mailed to Bob or simply deposited into his brokerage account.
What Does The Term Dividend Yield Mean?
The term dividend yield is simply a percentage based on the stock's expected return over the course of a year in dividends.
For example, if a stock is currently trading at $50 per share, and the company pays a dividend of $5.00, then the company would have a dividend yield of 10 percent.
This is calculated by taking the stock price and dividing it by the dividend.
Dividend yields are constantly changing.
This is because the price of the stock may be changing.
Volatile stocks may see very large swings in dividend yield while very sideways and non-volatile stocks may see a more consistent dividend yield.
When it comes to dividend investing, investors will examine the stock's dividend yield as well as other factors such as stock volatility, price trends, future guidance and more.
Just because a stock may pay a high dividend does not necessarily mean that it is a good buy.
Often times, stocks that may be considered riskier pay a larger dividend in order to try and attract investors.
While the stock may pay a larger dividend, it may also potentially lose value if its stock price drops this erasing any gains from dividends.
Some dividend investors buy stocks solely based on their dividend payments, and they may consider any price appreciation in the stock price to be a nice bonus.