Today, we examine the basics of dividend investing and answer the question, “What are Dividends?”
Simply stated, a dividend is a payment that is made by companies to their shareholders. The purpose of a dividend is to distribute a company’s profits to their investors.
There are two types of dividends – normal and special. In this article, we cover normal dividends.
Dividend payments are usually paid out quarterly., but can also be paid out in other intervals. Dividend are paid per stock and are declared on a stock’s ex-dividend date and are paid per stock.
A stock’s ex-dividend date is the date that a shareholder must own the company’s stock to receive a dividend. If you purchase shares after the ex-dividend date, you will not be entitled to receive the dividend payment. However, if you do hold the stock, and sell it after the ex-dividend date, you will still receive the dividend.
A dividend yield is a ratio of the amount of money paid out in dividends each year in relation to its share price. Dividend yield is represented as a percentage. To calculate dividend yield, divide the dollar value of the dividend paid in a particular year on one share of stock by the dollar value of a share of stock.
For example, let’s say stock TYD (track your dividends) pays out $5 per year and is at a stock price of $100. The yield of TYD would be 0.05 or 5%.
High Dividend Yields
When you begin investing for dividends, you may be inclined to go out and purchase stocks with the highest possible dividend yields. In fact, you may see stocks claiming dividend yields of 20% or more. Be aware, investments like these are usually very risky. Stocks offering such a high dividend yield are setting themselves up for an unsustainable payout ratio. In other words, it is highly likely that they will pay out more in dividends than they earn in profit. Once the company runs out of money, the dividend will be slashed, and your investment will drop in value.
What are Dividend Aristocrats?
Dividend aristocrats are certain dividend stocks that have a long history of paying out dividends and increasing those dividends year over year. These stocks are generally considered safer to invest in due to their huge size and long history, but you must still do your due diligence before making any financial decisions.
Investing in dividends can be a powerful strategy to prove your investment results. Learn more about how to get started dividend screening and tracking your investments.