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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