Every financially intelligent person knows that money has no value when it is held—its true value comes from when it is exchanged for something else. Purchasing stock in a company is a great way to use money to acquire assets that produce money for you. One of the most popular methods of investing is dividend investing, i.e. purchasing stock in a company with the main purpose of benefitting from its regular dividend payments.
Dividend investing, while easy to understand, can get quite complicated when it comes time to actually make investment decisions. There’s so much you need to consider, such as the company’s dividend payout system, how and when to expect returns, whether the company offers reinvestment programs, and so forth.
This article will help clarify everything you need to know about dividend investing so that you can make better decisions when it comes to dividend investments.
Let’s get started.
Table of contents
- What is a dividend?
- Who receives dividends?
- Crucial dividend dates
- Why do companies pay a dividend?
- How often are dividends paid?
- Does dividend affect the share price?
- Do stocks always pay dividends?
- Can you live off your dividends?
- How do you know how often stocks pay dividends?
- How long do you have to hold dividend stocks to get the dividend
- Are dividend reinvestment programs worth it?
What is a dividend?
A dividend is an amount a company pays to individuals and companies who own shares of their company. These individuals are referred to as shareholders. The amount paid is a fixed percentage based on the value of the current share price of all held shares within a specified period, which is also referred to as a bonus.
Stock dividends are given to investors/shareholders by the company as an incentive to encourage them to further invest with them. The company ‘shares’ the profit of the business with shareholders, which they can reinvest to make more money. The higher the shares held by investors, the higher their stock dividends.
Who receives a stock dividend?
Dividend payment is made to all the investors and shareholders a company has as a way for them to share in the company’s growth, thereby maintaining their interest in the stock.
The dividend payment will only be made to investors who buy dividend stock before the ex-dividend date, which we will look at in a second. This simply means that any stock bought on or after the ex-dividend date will not pay a dividend until the next period ends. We will look at the crucial dates below.
Crucial dividend dates
Before we move on to what companies pay dividends to investors, it is crucial to know the dates that shareholders can invest in the stock, hold their shares, and expect dividends.
The ex-dividend date is one of the most important dates when talking about dividends. It refers to the day in the trade cycle when the stock trades without dividends. Before this date, all stocks bought will entitle the owner to receive a dividend at a later specified date. Stocks bought after the ex-dividend date or on the ex-dividend date will not entitle the owner to the next dividend payment.
This date comes typically two days after the ex-dividend date and it is the telling date that determines who gets dividend income from their dividend stocks. Stocks have to be settled before the record date or will be left without dividend payment on the due date.
The payment date is the date the company has set aside for dividend payment. This date is not set for individuals depending on their investment date. The payment is made on the same day to all the investors, regardless of whether they sold their dividend stocks earlier during the record date.
They get their dividend yield in their brokerage account based on the company’s set schedule. The bottom line is, the different yield/payments will be different for every stockholder, depending on the number of dividend stocks they bought.
Why does a company pay dividends?
There are several reasons why a company pays a dividend on their stock and some of these are the reasons:
Regular dividend payments make the stock much more attractive to investors. In general, a stock that pays dividend will have a higher buying rate than one that doesn’t. The most interesting part is that the demand for the stock doesn’t dwindle even in an economic downturn. This is because, as long as the shareholders keep getting dividends, more and more people will continue to invest in it.
An example of a very attractive investment right now could be stock’s in the Canadian lumber industry. Although these stocks may not pay dividends they are definitely very hot on the market.
Paying every shareholder
This is the most basic and most important reason why companies pay dividends on their stock. Investors need a dividend yield on their investment in the company’s stock. If that dividend isn’t paid into their brokerage account, you can bet they’ll pull out their funds because that shows that the company isn’t growing or making any profit.
Sharing excess cash dividend
Investing in stock comes with great perks and this is one of them. Depending on the growth rate, some companies may decide to distribute their excess capital gains to shareholders, instead of reinvesting the capital.
Companies as big as Coca-cola will do this. However, even companies that are still going through the product development phase will create a dividend reinvestment plan to help them boost their growth. Dividend reinvestment programs are an added advantage to shareholders as they work like compound interest.
To show stability and build trust
The moment a company stops paying dividends, potential investors and shareholders will begin to question their stock. Consequentially, the stock price drops as demand for it falls. A company has to prove to the shareholders that it is stable and growing at a steady rate and paying dividends is one way to do that.
How often are dividends paid?
The majority of companies offering dividends typically pay off cash dividends quarterly (once every four months). Note that any stock that is bought after the ex-dividend date will not receive a dividend on that quarter’s payment date.
Only on very few occasions will you find companies that pay dividends yearly (annual dividend) or semi-annually (once every six months). That’s not to say it doesn’t happen it is just very rare. There are also cases known as ‘irregular dividends’ where some companies, especially in the U.S, pay the dividend on the stock based on their own set guidelines. Sometimes, there is even no specified payment date. Stockholders receive dividends based on timing, stock value, or quantity.
Basically, how often stock dividends are paid out will depend greatly on the board of directors and how they designed their payment plan.
Does dividend affect the share price?
Dividends are a major factor in how a company’s shares are valued. Long-term investors are constantly monitoring the status of their dividend payouts. The moment it is cut, the stock becomes less desirable and demand drops which reduces the share price.
If the dividend is raised, on the other hand, the stock becomes more attractive and desirable to investors which ultimately increases the price. However, be wary of companies that promise huge dividends without a successful track record to back it up. It could simply be a ploy to try to increase share price. If you’re a new investor, it would be best to seek investment advice from professionals.
Do stocks always pay stock dividends?
Investing in stock that pays dividends is enticing. However, as interesting as the idea of dividends is, not all firms will pay dividends on their stocks. This is because some firms are still in the development phase and need to reinvest their earnings to keep the business growing. The value in these stocks is not the promise of dividends, but the capital appreciation of its share price which is usually higher than stocks that pay dividends.
Can you live off your dividends?
Living off your dividends is a popular way for people to retire. You can definitely live off your dividends as long as you start investing early. Conduct thorough market research and cross-reference with other relevant sources to know which company’s shares will be more profitable in the future.
How do you know how often a stock pays dividends?
Investing in shares without knowing how often it pays dividends is a big mistake, especially if you hope to withdraw your dividends for use. A company will clearly state how they have set up their methods for payments of dividends. This plan is set by the board of directors and passed on to shareholders and members of the public who may want to invest.
How long do you have to hold dividend stocks to get the dividend?
Having read through the content on this page, you should already have the experience and knowledge that dividends are typically paid two days after the ex-dividend date. Even if you had bought the stocks at the last minute before the ex-dividend date, you’re entitled to dividends on your shares.
Are dividend reinvestment programs worth it?
A dividend reinvestment plan makes the job of a long-term investor easier as he doesn’t have to receive cash dividends in his brokerage account and have to reinvest them manually. What the company does is simply reinvest the dividends that they owe you back into more company stock—with your permission of course. The program is definitely worth it as it increases the long-term profitability of the investor.
Another advantage to this is that some companies reduce the price of their shares for existing shareholders who wish to add to their shares. A reinvestment plan means that they can have more shares—and, ultimately, more dividends—without even having to pay more.
Can you get rich off penny stocks?
Making money off penny stocks is one thing. Getting rich off them is another. Some penny stocks do pay dividends based on the schedule of the company’s board of directors. However, considering that penny stocks are inherently riskier and more volatile, it simply would not be wise for a long-term investor to rely on these to carry them through retirement. You’d be better off with larger, safer companies such as Coca-Cola or Apple.
There you have it—everything you need to know about dividends! This knowledge will undoubtedly help you make wiser investment decisions when it comes to dividend investing. As always, make sure to carefully do your own due diligence before investing any of your hard-earned money.