All about Dividends in Stock Investing
Recently, we’ve been hearing news of companies paying dividends to their shareholders. Of course, we know that dividend income is one of several ways to make money from stock investing.
(See article: How are profits made in the stock market?)
But aside from that, what else do we know about Dividends? This article is a short tutorial on Dividend Income.
What are Dividends?
Dividends are money distributed by a company to its shareholders. When a company is profitable, it may decide to return part of this income to the owners of the company: the shareholders. Look at it as a way to “cash out” income. In a small one-person business, for example, the sole proprietor may decide to withdraw a share of the business income, instead of reinvesting it in the business. This “withdrawn income” is a way for the sole proprietor to “cash out” his gains in the business.
Similarly, shareholders may decide to “cash out” the income earned by the company he/she invested in. However, the investor cannot do so unilaterally. Receiving part of the business income (i.e., the dividends) has to be approved by the company’s top management. It is even possible that despite years of positive profits, a company may still decide not to distribute dividends and instead reinvest all income back to the company. Several companies are doing this, with the promise that the reinvested profits will grow the company further, in the hopes of paying higher dividends in the future or exponentially growing the company’s stock price.
What are various types of Dividends?
In the Philippines, there are three types of dividends, although only two are the most common and popularly used. The basic form is cash dividends which are, obviously, a distribution of the company’s income in the form of cash.
The second most common type is stock dividends, which are dividends distributed to shareholders in the form of additional shares of the company.
The third and rarely used form of dividends is property dividends, which are dividends in the form of other assets, such as tangible products of the company or shares of stocks in a company affiliate or subsidiary. Learn more about Property Dividends here.
What are important dates regarding Dividends?
There are a few dates that investors must know with regard to dividend payouts. These dates are important because they determine which shareholders are entitled to receive dividends and which ones are not.
Declaration Date. This is the date the company announces it is declaring dividends. On this day, a liability (Dividends Payable) is recorded in the books of the company. On the declaration date, the company also announces the ex-date and payment date.
Ex-Date or Ex-Dividend Date. The ex-date or ex-dividend date is that date that does not entitle new buyers of the stock to receive dividends. Simply speaking, if you bought a company’s stock on the ex-date (or later), you will not receive any dividends. A simple mnemonic device to help remember its meaning is that if you bought the stock during its ex-dividend date, you are excluded from receiving dividends.
Date of Record. The record date is when the company looks at its “books” to check who have been “recorded” as official shareholders, because these are the only ones entitled to receive dividends. The record date is usually 2 days after the ex-date because it takes three (3) days to complete a stock transaction.
Payment Date. Of course, the payment date refers to that day when the company disburses the cash, stock or property dividends to stockholders on record.
What is Dividend Yield?
The dividend yield is the percentage of income received as dividends compared to the stock price. The dividend yield formula is Dividends divided by the Stock Price.
If a company, for example, announced cash dividends of P5.00 per share, and each share is trading at P100.00 during that time, the dividend yield is 5%. Of course, the higher the dividend yield, the bigger the income that will be received by the investor. Hence, investors with a Current Income investment objective compare various dividend yields in the hopes of getting higher current income.
How to Compute Stock Dividends?
If a company declared a 25% stock dividend and you currently own 100 shares of stocks of that company, how many new shares will you receive as dividend?
The correct answer: 25 new shares. That’s simply 100 * 25%. After receiving the dividends, your total shares become 125.
How to Compute Cash Dividends?
Now, what if you owned 100 shares and the company declared a Php 0.10 dividend per share, how much cash will you receive as dividend income?
If you answered P100.00 dividend income, you are correct. We got that by multiplying the number of shares you own (1,000) with the dividend amount per share (Php 0.10). Simple, right?
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