How Dividend Stocks Work


If you’re searching for a reliable way to accumulate wealth in the long term, you must try investing in dividend stocks. This has probably crossed your mind before, but before you lay your hands on them, do you know how dividend stocks work? Read on to learn how they work, and what you should do to invest in them properly.

What are dividends?

We won’t beat around the bush. Right off the bat, we’re telling you that you’ll get paid for just owning a stock. For every share of a dividend stock you have, you get a slice of that company’s earnings.

For instance, suppose that a company pays an annualized dividend of 80 cents per share. A big number of companies pay dividends every quarter, or four times a year. This means that that company will send you a check for a quarter of 80 cents, and that is 20 cents for every share you own.

Of course, that’s just a small number. It’s quite insignificant at this point. But have you imagined owning a thousand shares of that company? When you have already built your portfolio up to a thousand shares, you can use the dividend payments you receive to buy more stocks. That means more money for you.

In simpler words, reinvest your dividends.

Dividend Kinds

Like other asset classes, dividends have several kinds. We’ll list some of those kinds below, and see if any of them hits your fancy.

Cash Dividend

Cash dividends are the most common, and many investors prefer to invest in these more than other kinds. How does it reach your pocket?

On the deceleration date, the company’s board of directors pays a certain dividend amount in cash to investors who hold the company’s stock. They set a specific date for this. The date of record marks the date when company assigns dividends to stockholders. The date of payment is the moment you’ve been waiting for—it’s when you can get the dividend payments.

Stock Dividend

The company often issues its common stocks to its common shareholders without considerations. If the company issues lower than 25 percent of the outstanding shares previous, that’s what you call a stock dividend. If the company issues a greater proportion of the previous outstanding shares, you call that a stock split.

Property Dividend

Instead of paying in cash or in stock, some companies choose to pay non-monetary dividends. It can be in the form of physical assets like the inventories that the company holds. That dividend is recorded at the market value of the asset. It’s a lot less common that the two above, though it still is a good payment to receive.

Special One-Time Dividends

A company may also choose to pay a special one-time dividend. This is the rarest among the four we have listed, though it can occur for various reasons. Among those reasons are a major litigation win, sale of business, and the liquidation of an investment. The thing about it is this: it can take the form of cash, stock, or property dividends.

Important Dates

When it comes to dividends payments, there are important dates that you ought to remember. Many people are not good at remembering dates, but surely these dates matter to investors. They should also matter to you if you choose to invest in dividend stocks. We have tackled some of them briefly above.

Declaration Date

This is when the company’s Board of Directors announces their plan to pay a dividend. First, the company creates a liability on its books, which means it now owes money to stockholders. And if they pay high, you’ll wish you were one of those stockholders. Then, the Board will announce the date of record and the payment date.

Date of Record

 This date is another busy day for the company. On this day, the company reviews its records. Why? To know who the shareholders are. If you’re an investor in the company, you must be a “holder of record.” If you’re not, you won’t receive a dividend payout.

Many stocks generally begin trading ex-dividend, or ex-rights, the second business day before the record date. What does this mean? It means that the only the owners of the shares on or before the ex-dividend date will receive the dividend. It’s unfortunate if you’re not one of those lucky people.

Ex-Dividend Date

The ex-dividend date of a stock is by far the most important date for you to consider. Because if you overlook this date, you might end up not receiving a dividend payment. You must purchase the shares of the stock before the ex-dividend date.

Payment Date

As the name suggests, and as we have mentioned above, this is the day when you’ll get the dividend payment.

How Often Is The Payment?

Of course, it matters when you get paid if you’re really planning to invest in dividend stocks.

As we have mentioned, a large number of companies pay dividends four times a year. However, there are also many companies that pay semi-annually, or twice a year. Then there are some that pay annually, or once a year. If those are still too far apart for you, there are companies that pay monthly. Then, there are also those who pay without scheduling. They’re called “irregular dividends” and they are the rarest of all types of dividends.

For US stocks, corporations are free to set their own payout policies. They have the power to decide about the size and the timing of the distributions. There is no governing rule for the frequency of dividend payouts.

The reason why many corporations pay dividends quarterly is that it aligns with the legal requirement to report earnings on a quarterly basis. But overall, the Board of Directors has the sole power to choose the frequency and the dates of such payments.

Many companies outside the United States choose to pay semi-annually or annually. And then, there are many instances when the securities themselves don’t stick to the quarterly payout plan. In most cases, companies are structured to generate a consistent distribution of income to shareholders. And these companies tend to pay dividends on a monthly basis.

Final Word

Dividend stocks are one of the major asset choices that investors, beginners and pros alike, consider. Now that you know how dividend stocks actually work, it’ll be easier for you to decide to invest in them. Of course, just like many other asset classes, these stocks come with their own risks. You should also know more about those risks.

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