1. Introduction To Dividends: Introduction
  2. Introduction To Dividends: Terms To Know And Other Basics
  3. Introduction To Dividends: Dividend Dates
  4. Introduction To Dividends: Investing In Dividend Stocks
  5. Introduction To Dividends: Doing Your Homework And Taxes
  6. Introduction To Dividends: Conclusion

When learning about dividends, it’s helpful to understand the basic terminology. Here’s a quick rundown of dividend terms, which can be used as reference throughout this tutorial.

 

Cash Dividend

Cash payments made to stockholders, paid on a per share basis and quoted as a dollar amount or as a percentage of the current market value. Cash dividends are typically paid out of the company’s current earnings or accumulated profits.

 

Declaration Date

The date a company’s Board of Directors announces an upcoming dividend.

 

Dividend

The portion of a company’s profits that are distributed to eligible shareholders. Dividends are paid in cash or as additional shares of stock.

 

Dividend Cover Ratio

The ratio between a company’s earnings and its net dividend to shareholders. This ratio helps investors measure if a company’s earnings are sufficient to cover its dividend obligations. It’s calculated by dividing earnings per (EPS) share by dividend per share (DPS).

 

Dividend Reinvestment Plan – DRIP

A plan offered by certain dividend-paying corporations that allows you to automatically reinvest cash dividends by purchasing additional shares of stock on the dividend payment date.

 

Dividend Yield

A financial ratio that illustrates how much a company pays out in dividends each year relative to its share price. It’s calculated by dividing the annual dividend per share by the current stock price. (Check out Investopedia’s Dividend Yield Calculator.)

 

Ex-Dividend Date

The date on or after which a stock trades without its dividend. The ex-date is one business day before the record date.

One-time Dividend

A special dividend paid in addition to regular cash dividends.

Payment Date

The date a declared dividend is scheduled to be paid.

Record Date

The date the company uses to determine its shareholders or “holders of record.”

Shareholder

Any person, company or institution that owns at least one share in a company. Also called a stockholder.

Stock Dividend

Stock dividends are dividends paid in the form of additional shares of stock instead of cash.

Dividend Basics

Companies that earn a profit can:

  • Reinvest the profits through expansion, debt reduction and/or share repurchases
  • Pay a portion of the profits to shareholders
  • Do both – reinvest and pay out to shareholders

When a company pays a portion of its profits to shareholders, it does so by paying a dividend.  A dividend is a payment made to eligible shareholders, paid on a quarterly or yearly basis, that represents a portion of the company’s profits. Companies in the U.S. typically pay quarterly dividends, while non-U.S. companies generally pay annual or semi-annual dividends. (For more, read How and When are Stock Dividends Paid Out?)

Not all companies pay dividends to shareholders, and companies that do may increase, decrease or eliminate future dividend payments, depending on how the company is performing. For example, a company may decrease its dividend to free up cash to acquire another company. Most companies, however, try to maintain and increase dividends to keep shareholders happy and avoid drawing negative publicity. Coca-Cola (KO), for example, has paid a quarterly dividend since 1920 and has increased its dividend every year for the last 55 years. [L1] (For related reading, check out Why do Some Companies Pay a Dividend, While Other Companies Do Not?)

Dividends are normally paid on a per-share basis, and the amount you receive is based on the number of shares you own. For example, if Coca-Cola decides to pay a quarterly dividend of $0.37 per share (as it did during each quarter of 2017) and you own 1000 shares, you would receive a dividend of $370 (1000 shares X $0.37 per share). Of course, it’s important to look at more than just the dollar amount you get from a dividend. You have to consider your investment as well (how much you paid for the stock) so you can decide if the stock is providing a good return. That’s where the dividend yield comes in.   

Dividend Yield

The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. It’s important because it represents the total return of an investment, and offers a good way to compare potential investments. You can calculate dividend yield using the following formula (check out Investopedia’s Dividend Yield Calculator)

Figure 1: How to calculate a stock’s dividend yield.

Here’s an example. Assume Coca-Cola is trading at $48 per share and the company offers an annual dividend of $1.48 per share. The dividend yield would be 3.08% ($1.48 dividend ÷ $48 share price). Note that price and yield move in opposite directions. If the share price was higher, say $58, the dividend yield would decrease ($1.48 dividend ÷ $58 share price = 2.55% dividend yield). Conversely, if the stock was trading at a lower price, such as $38, the dividend yield would increase ($1.48 dividend ÷ $38 share price = 3.89% dividend yield). If the dividend stays the same, you get more bang for your buck if the share price is lower.

It’s easy to become wide-eyed over companies that offer high dividends – but keep in mind, those impressive figures may not represent a stable investment. High dividend yields often signal low future growth prospects. A really high dividend yield might be a red flag that the company is facing financial difficulty that the market expects to be accompanied by cuts to future dividends. An easy way to spot potential problems is to look at the stock’s dividend payout ratio. If it’s above 100%, the company is spending more on dividends than it’s making in profits – which is not a sustainable business practice. (For related reading, check out Stocks with High Dividend Yields: Why They’re a Trap.”)

Low dividend yields, on the other hand, often indicate high expected future growth. During the last 20 years, the average dividend yield on S&P 500 stocks has been between 1.17% and 3.23%. [L2]   (For more, read What are Some Possible Red Flags in a Company’s Dividend Payout Ratio?)

Cash Dividends, Stock Dividends and One-Time Dividends

Cash dividends are what we’re normally referring to when talking about dividends. These are cash payments made to stockholders, paid on a per share basis and usually quoted as a dollar amount, such as $1 per share (sometimes dividends are quoted as a percentage of the current share price, such as 2.5%). Cash dividends are typically paid out of the company’s current earnings or accumulated profits. To take advantage of compounding, many investors reinvest their dividends to buy additional shares of stock.

A stock dividend is a payment that’s made in the form of additional shares, rather than cash. A company may decide to distribute this type of dividend to reward investors while keeping its existing liquidity for other investments (such as acquiring another company) or because it doesn’t have the capital. The number of additional shares you receive depends on the number of shares you currently own. For example, a company may issue a stock dividend equal to 0.05 shares for each share held by existing shareholders. In this example, if you owned 500 shares, you would receive 25 additional shares.

When a stock dividend is issued, the price of the stock will likely respond to the dividend so that shareholders’ post-dividend wealth remains the same. The stock dividend increases the number of shares each stockholder owns but does not necessarily have an immediate effect on the overall value of each stockholder’s shares. (For more, read Which is Better: A Cash Dividend or a Stock Dividend?)

In addition to paying cash and/or stock dividends, a company may also pay a special one-time dividend. This is done for for a variety of reasons, such as a sudden increase in cash resulting from the sale of a business or substantial litigation winnings. During the last quarter of 2012, with the “fiscal cliff” approaching in the United States, many companies issued one-time dividends in anticipation of the higher dividend tax rates presumed to go into effect starting January 1, 2013.


Introduction To Dividends: Dividend Dates
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