Dividend Desk

Business by worradmu

A company pays dividends to investors as an incentive for investing with their company. This also attracts new investors, both individuals and other companies looking for a return on their investments. So what is a stock dividend? Our Stocks Vocabulary section states that a Stock Dividend “is a portion of a company’s profit given back to investors in either cash or stock value. Dividends are given out monthly, quarterly, semi-annually, and annually.” These are the most common schedules. Companies may not have dividend schedules at all, they may give out dividends only when they feel they don’t have any other use for the profits. And generally, companies will announce their dividends months before they actually give them out. They will also announce an ex-dividend date, also known as just an ex-date, and tied to it is the record date.

The ex-date is the first day a stock’s dividend is actually due. This means that if you want to be paid the next dividend by a company, you must purchase the stock before this date. If you purchase the stock on or after the ex-dividend date, you are not entitled to the next dividend payout. Why is that?

When you purchase stocks, they take time to settle. They won’t be recorded immediately. Even though the internet makes it easy for us to invest and buy stocks, it still takes time for purchases and sales to settle, it can take several days in fact. This is where the record date comes into play. Generally, the Record Date is two days after the ex-date. The record date is used by companies to determine which of their stockholders are entitled to their next dividend payout. If your name is not listed in their database or on their list of stock holders during the record date, you will not receive the next Dividend payout, even if you purchased the stock on the ex-date (2 days prior to the record date) because enough time hasn’t passed for your purchase to settle.

Dividends may seem complicated, but once you get used to the process, it’s actually quite simple. And from the above, you can deduct what will happen if you sell your stock on the ex-date. If you sell your stock on the ex-dividend date, you will receive the next dividend payout. Why? Well, as mentioned above, it takes time for orders to settle, and if you sell on the ex-date, your sale won’t be settled until after the record date. The company will still see your name on their list during the record date even though you may no longer own the stock and pay you the next dividend. Now if you sell the day before the ex-date, your order will most likely settle by the Record date and you will no longer be eligible to receive the next dividend.

Most company pay their dividends in quarterly schedules, or every 3 months for a total of four times a year. Some companies may have a semi-annual or even annual dividend schedule where they pay every 6 months or just once a year. A few companies also have monthly dividends that they pay at a certain time every month. Whatever the company’s schedule may be, the dividend announced is an annual dividend. For example, if a company announces a dividend of $1 per share, it means that they will pay out a total of $1 per share for the year. So if that company has a quarterly dividend schedule, you will get paid $0.25 per share every 4 months. If the company has a semi-annual schedule, then they will pay $0.50 per share every 6 months. The same goes for any other kind of schedule a company may have.

Companies that give out dividends will announce how much they will pay per share. And using that amount, you can figure out the total Yield of the dividend. The yield is just the  percentage of the dividend paid against the stock price. The value of the yield is far more dynamic than the value of the actual dividend.

For example, let’s say that you own 10 shares of Company Alpha with a worth of $10 per share. Let’s assume that Company A announced that they will pay $1 in dividends for each share per year. That’s a return of 10% and the 10% is the dividend yield.  So why is the yield dynamic? Let’s say 3 months from now, Company Alpha’s stock prices drop to $5 per share but they don’t change the amount they will pay in dividend. The dividend is still $1 per share, but now, the dividend yield is 20%. The amount of money you are getting back per share in dividends hasn’t changed, however the overall value of the stock has along with its dividend yield. The effect is the same if the stock value of Company Alpha rises to $20 per share, the yield at that point would be 5%.

As mentioned earlier in the article, dividends may also be paid out in stock value. Instead of getting cash, the company may give you extra shares of the stock depending on how much you own. Obviously, the more shares you own, the more shares you’ll earn during a dividend payout. This also results in some investors having decimal points in the number of shares they own. This isn’t better or worse than a cash payout. With a stock value payment, you won’t have to worry about paying taxes on your dividend, however, when you sell your stock, you will have to pay the taxes for the value of the share. There are advantages and disadvantages for each kind of payout so one isn’t better than the other.

Companies don’t have to give out dividends. Dividends are generally given out to encourage new investors. Companies that don’t have dividends aren’t necessarily bad, it could just mean that they are using their profits for the growth of their companies. Many companies use profits for Research and Development while others use the profits to invest in other companies to increase the value of their own company.

You shouldn’t only look at dividends when investing. You should also be careful about companies that give out too much dividends. You will come across companies that pay up to 50% of their stock value. It may not always have been a 50% yield, the price of the stock may have just dropped, but this stock is something people would call risky. The dividend would be extremely risky because there is a high chance the the company will either decrease their dividend payout greatly or cut it out altogether as some companies have had to do in the past to cut losses or stay in business. And if you purchased the stock because of its high dividend, you will be disappointed.

Stocks with 20-30% dividend yields are also somewhat risky. Although the risk is far less than a company paying out 50% in dividends, there is a big chance that the company will decrease their dividend amount in order to save the company money. Dividends should be a small factor in deciding what companies to invest with. You may get a bigger profit by investing a company that doesn’t give out any dividends but research shows that the company’s stocks will skyrocket because of a new product they are introducing or because the competition is doing poorly.

If you are looking at a dividend announcement by a company, be sure to really look at it for the essential information before assuming. You should look at how much dividend they are paying per share, what their schedule is, as well as the yield percentage because this can be a big indicator of how well a company may or may not be doing. Another thing to look at is the method of payment, whether it’s cash or sock value. Also be sure to pay attention to when the ex-dividend and record dates are so you don’t miss out on the next dividend payment.