Understanding Stock Dividends
Updated: Sep 18, 2020
What do you own right now that pays you back at least once a year? What asset do you have that will consistently put money back in your pocket?
Lyft and Uber drivers would say their car. Tee-shirt designers would say their shirt press. Landlords would say it is real estate. But for investors, it is their dividend-paying stock portfolio.
What is a stock dividend?
Let’s break it down……..
Stock Dividends are payments made by a company to its shareholders, usually every quarter.
OK, I get it, that was way too technical; in a nutshell, dividends are cash paid out to people who have partial ownership in a profitable company. The company can decide to do two things with its profits, reinvest it into innovation, Infrastructure, and marketing. The company can pay a portion of the profits out to its owners as a thank you. A stock dividend is another way for a company to say thank you.
Who pays dividends?
You can invest in three stocks (remember, the stock is just a fantasy word that describes your ownership in a company).
Growth Stock: a company that experiences rapid growth at an above-average pace. Most of their revenue is then reinvested in the company to fuel that growth (myvoleo2020).
Value Stock: a company that seems to be undervalued in the market, even though it has a healthy financial status. A value stock is usually purchased by investors at a bargain price in the hopes that it will increase in value (myvoleo2020).
Income Stock: a company that is stable but provide a high dividend yield. In most cases, utility stocks are known to pay competitive dividends. Although these stocks are less risky and pay regular dividends, their return will likely be lower than value and growth stocks(myvoleo2020).
Let me be clear, all types of stocks can and may pay dividends. However, it is income stock where you will usually get the most Bing for your buck when it comes to dividend payouts.
How does purchasing a stock that pays dividends work?
It’s not about owning the stock when it comes to dividends, it is about owning the stock on the right date. You have to make sure you are a shareholder on the record date. Here are dates to know:
* Declaration Date: “The official announcement” The declaration date is when a company’s board of directors announce the payout amount, date of record, and payment date.
Ex. We’re having a baby! It’s a girl (payout amount), the baby shower is on July 1st (the payment date), and we’d like you to come. Please RSVP by June 20th (record date). We can’t wait!
* Ex-Dividend Date: The barrier date, you must own the stock the day before the Ex-date, if not, you will be X’ed out! Make Sense?
Ex. The day after the final day to RSVP for the baby shower. Are you coming or not?
* Record Date: You must own the stock by this date, don’t get it confused with the EX-date; the record date is typically two days before the Ex-dividend date.
Ex: Let’s refer back that baby shower, imagine having to mail your invitation to the shower out to your friend (typically it takes two days for someone to get your mail locally). If the RSVP is due on June 20th, that’s the Ex-date the date of record would be June 18th, which is the absolute final day you have to send your RSVP in the mail for your friend to get it before the ex-date.
* Payment Date: When the money is paid out to all eligible shareholders. Remember, to qualify for dividend payments, you have to own a piece of the company before the ex-date and on or before the record date.
Ex. When it comes to the baby shower, you won. You are getting all the free food, candy and don’t forget to grab your take-home gift on your way out the door. Payment cashed!
In short, with every investment, do your homework. Ensure you are connecting your financial decision with your financial goals and objectives and always remember to contact a financial professional if you have any questions or concerns.
1. Kramer&Martell (2020). What is a Dividend from https://learn.robinhood.com/articles/6jGOO5O2YvyoZzlEUtIq0F/what-is-a-dividend/
2. Myvoleo (2020). Growth vs. Value vs. Income Stock