Dividend Basics
If you are new to the idea of dividend investing than this is the article for you. If you have been investing in dividend stocks then you probably already know this information but stick around because you may be reminded of something that you have forgotten.
What is a dividend?
Quite simply a dividend is a payment that a corporation pays out to their shareholders. Which means that just by owning some of the company you will rewarded for it. Most of the time the company will pay a cash dividend where they simply write you a check for the amount. Sometimes though the company may offer a stock dividend where they actually reward you with more shares of the company. More times than not though you will be rewarded with a cash dividend.
Dividends are listed as an annual dividend. They are listed this way because some companies may pay a dividend every quarter and some companies may pay a dividend every month. So let’s look at some examples where a company pays an annual dividend of $2.00 per share.
Annual Dividend: $2.00 per share
Quarterly Dividend Paid 4 Times A Year: $0.50
So here the company is paying a quarterly dividend. So for each share that you own you would receive $0.50 in dividends every quarter. What if that same company paid a monthly dividend instead?
Annual Dividend: $2.00 per share
Monthly Dividend Paid 12 Times A Year: $0.16
Here we see the company paying $0.16 a month in dividends. In both cases though on an annual basis the company is paying $2.00 a share.
There is one special situation that is worth mentioning. If a company is doing real good and can’t find nowhere else to put capital to work sometimes they will pay what is called a special dividend. What that means is they will pay a dividend outside of their annual dividend. Usually if a company pays a special dividend it is an amount higher than the normal dividend. Special dividends are not paid on any kind of schedule so there is no way to prepare for them.
There are many different reasons why a company would choose one or the other. It is very important to know how often the dividend is paid before you decide to invest. How often they pay a dividend is not the only thing that you should know before you decide to invest. There are also several dates that you should be aware of. So let’s take a look at what those dates are.
Dividend Dates
The least important dividend date will actually be it’s declaration date. This date is simply the day that the company decides to announce their next dividend. Some companies might announce a week or two before the dividend is paid while others may announce a month or two beforehand. This doesn’t affect anything with the dividend.
The next date that we look at will be the record date or the date of record. Shareholders who have properly registered their ownership on or before this date will be entitled to the dividend. If you purchased shares but they have not cleared until after this date then you will not receive the current dividend but you will be paid the next dividend as long as you continue to hold the shares until the next record date.
Most investors do not look at the record date much because it is correlated with the ex-dividend date. If you purchase the stock before the ex-dividend date then that will allow it time to be properly registered so that you will be paid the current dividend.
Now we get to the most important date of all and that is the payment date. Just as the name suggest this is the date in which the dividend is paid to all shareholders on record.
You may be asking yourself what do I do when the dividend is paid?
What do I do when a dividend is paid?
If you have purchased dividend paying stock before the ex-dividend date then you are entitled to receive a dividend payment. There are a couple of ways that you could handle this situation. First, when the dividend payment shows up in your brokerage account you could withdraw the money and spend it. If you didn’t want to spend it immediately you could also let the money collect in your brokerage account and then decide the invest it later on. The one drawback to this plan is the fact that you would be incurring another transaction fee when you purchased stock with it. Lastly, you could choose to DRIP the dividend.
Dividend Reinvestment Plan is a very popular strategy among dividend growth investors because it allows you to compound your investment. So here is how it works. When the company pays you the dividend you never actually see the money because your broker takes that money and reinvests it back into the company stock. Unlike our last scenario if you choose to DRIP the dividend you won’t have to pay a fee. What happens is each time you get paid a dividend your share count will go up. With your share count going up each time that means that your dividend payment will increase each time as well.
Conclusion
Dividend investing isn’t too complicated when you are armed with the correct information. That begins with an impeccable understanding of the fundamental information on dividends. It is very important to understand what a dividend is, at what frequency you are paid a dividend, as well as when and how you will be paid that dividend.
Once you understand this basic information there is no reason that you shouldn’t venture deeper into the world of dividend investing. With an understanding of a few more concepts you will be prepared to jump in and actually start building your own dividend portfolio.
As always I look forward to reading all of your comments and questions, until then….. happy investing!
-Jason from MoreDividends.com
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