What are dividends?

Dividends are payments shareholders receive from a company’s earnings.

When a company is profitable, management could choose to either distribute the profits to shareholders in the form of dividends or reinvest the profits to help grow the business. 

Dividends come in two forms, cash, and stock. When you earn dividends you’ll see them reflected in your investment account—your broker takes care of this.

Example: 

In 2021, P&G distributed $3.24 per share. If you owned 100 shares then you would see $324 extra dollars in your investment account.

Companies that pay dividends typically tell investors that they have excess profits that they are willing to give to their shareholders. So, you won’t really see unprofitable companies or growth-focused ones give out dividends. For example, Amazon is a company that is growing super fast and its profits are going right back into the company to fuel growth.

How can you evaluate a company’s dividends?

The most widely used indicator to assess dividends in a company is the dividends yield metric. It essentially tells investors how much return they will get for the price of the stock. You can also use it to compare the dividend payment of different companies. This is how it’s calculated:

Annual dividends per share divided by the stock price * 100

It is important to compare the dividend yield with the historical stock price. If a company’s share price falls sharply, its dividend yield will most likely increase which can be misleading. 

Dividend dates you should know

In order to be eligible for dividends, you need to be a holder of the stock before the Ex-dividends date. Owning a stock on the day a dividend is paid doesn’t guarantee that you’ll get any.

  • Declaration Date: The date management announces the dividends distribution and its value per share. By that time, if you aren’t a shareholder of a company you still have time to buy the stock.

     

  • Ex-dividend Date: In order to be eligible for a company’s dividends, you need to be a shareholder before and not on the ex-dividend date.

     

  • Record Date: The day on which your stocks need to be settled in order to receive the dividends. Stocks are typically settled 2 days after you buy them. In other words, if you own the stock prior to the Ex-dividends date then you are eligible for the distribution.

     

  • Payment Date: The date on which you receive the dividends distribution from the company. The time between the record and payment date is different between each company. It typically ranges between a week and a month. If you choose to sell your stocks on or after the ex-dividend date, you will still receive the dividends payments. 

When comparing stocks, it’s important to look at more than just the dividend yield. You need to understand that it’s about the quality of the stocks you own and not the amount of dividends the company distributes. A higher dividend yield may or may not be favorable for your investment goals.