What are Dividends? Stock Dividends Explained
Dividends are distributions that companies pay to their shareholders simply for being shareholders. Dividends are paid out as a portion of a company's earnings. As a shareholder of a company that pays out dividends, you are entitled to your share of the dividends based on how many shares you own.
A company has range percentage of their earnings that they pay out per share. This amount can change at anytime. In fact, the company is not required to pay dividends.
A company can choose to start paying dividends at anytime. They can change how much they want to pay out as they please. They can cancel their dividends indefinitely whenever they'd like. It's all up to the company's board of directors.
Usually, only companies with strong cashflows, earnings pay out dividends. These are well established companies that will likely continue to earn steady income from their business.
Next, a company can pay out their dividends as often as they please. Some companies pay out dividends quarterly, some every half year, and others pay out their dividends on a yearly basis.
Before we continue, let's look at a quick example. Say you own 100 shares of a company. If that company pays out dividends of $0.10 per share, you would be entitled to 100 * $0.10 which is $10 each time the company pays out its dividends.
Now let's discuss dividend yield and how you can calculate it. The dividend yield is simply a metric that tells you how much you can expect a dividend paying company to pay you in dividends yearly as a percentage of their share price at any given time.
Keep in mind that you must own a company's stock at least a few days before it pays out its dividends to qualify for payment. You may hear this date referred to as the record date, or the date on which the company decides and records which of its shareholders qualify for the next dividend payment. That means you'll want to own the stock at least a couple days before the record date to be recorded as a qualifying shareholder for the next dividend payment. This date is referred to as the ex-dividend date. It's usually a day before the record day, but varies by company. The record date is usually between one and six weeks before the payment date, but it varies by company.
We'll discuss this more in future videos, but another option you have with dividends is to automatically reinvest them instead of receiving the payment. Your brokerage can set this up for you, and it may be referred to as DRIP for dividend reinvestment plan.
There's much more to learn about dividends and many variables to consider when deciding whether to invest in dividend companies and which ones to choose. We'll cover those more in future videos as well as why investing in dividend companies when your young may be a bad approach to building wealth. I hope this has helped you understand how dividends work and what you stand to gain from investing in a company that pays dividends.
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DISCLAIMER: This and all of my videos are for entertainment purposes only. My statements are my opinions and should not be accepted as financial advice.