Aug 12 · 3 min read
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When looking at a stock’s summary statistics, you will likely see information about the stock’s dividend. Get excited because you’re going to like what you hear next! A dividend is a cash payment from a company to its shareholders, just for owning its stock! Companies that pay dividends use them as a way to share their profits with investors throughout the year. Depending on which broker you’re using, the details of a stock’s dividend can be displayed in different ways. Let’s review them all.
Dividends are usually shown as either a dollar amount, a dividend yield percentage, or both. Let’s discuss dividend dollar amounts first.
Dividends can be displayed as an annual, quarterly, or monthly dollar amount. Annual dividend amounts show how much you will be paid per share on a yearly basis. Even though annual dividends show your yearly payout, they’re not actually paid to you once a year. Annual dividend amounts are divided into four dividend payments to shareholders every quarter. Since there are four quarters in a year, a shareholder will be paid every three months. To figure out this quarterly payment, just divide the given annual dividend amount by four.
Quarterly dividend amounts show how much you will be paid per share every 3 months. If your online broker displays dividends by the quarterly amount, there is no further calculation needed. Just sit back and collect your cash. Dividends can also be shown and paid on a monthly basis. This happens less often but there are many stocks that pay dividends to their shareholders monthly. Regardless of the timing of the dividend payment, you can easily calculate how much cash you can earn in dividends by multiplying the number of shares you own by the dividend amount.
Dividends can also be displayed as a dividend yield. Shown as a percentage, a stock’s dividend yield is calculated by taking the annual dividend of a stock and dividing by its current share price. This ultimately shows you how much you will gain annually on your investment due to dividend payments alone.
As an example, if a company trades at $25 a share and pays an annual dividend of $1, the dividend yield would be $1 divided by $25. This would equal .04 or 4%. This means that if you owned this stock for a year, you would increase your investment by 4% due to dividend payouts alone.
So now that you understand what a dividend is, let’s look into exactly when and how you get paid.
There are two dates to focus on if you’re wanting to receive a stock’s dividend. The first date you should pay attention to is the Ex-Dividend date. This date is usually next to the dividend amount in the overview section for a stock. Investors must buy a stock BEFORE the Ex-Dividend date to receive the next dividend payment. Shares bought on or after this date are not qualified to receive the dividend. Investors who own the stock before the Ex-Dividend date will get paid on a Payment date specified by the company.
Now that you know when to buy a stock in order to get your dividend, let’s compare the two methods in which you actually get paid. Through most online brokers, you can choose to either receive your dividend as cash or to automatically reinvest it through a program called DRIP (Dividend Reinvestment Plan).
The default setting for dividends is a cash payment so If you want to get your dividends this way, there's nothing you need to do. Just sit back and watch the money get deposited in your account.
If you want to automatically reinvest your dividends into the stock that paid them to you, you will need to let your broker know you want to participate in DRIP. This can be done by a simple click of a button in your app. Enrolling in DRIP allows your dividends to be automatically reinvested, commission-free, into additional shares of the same stock. Your broker will automatically reinvest your dividends for you, even if your dividend payment isn't enough to buy a full share! Over time, this can allow your money to compound and grow tremendously. According to well-known investors like Warren Buffet and Kevin O’Leary from Shark Tank, this could make you very wealthy over a long period of time.
Ultimately, buying stocks with dividend payments is a great way to earn money in the stock market. Although this shouldn’t be the only reason for buying a specific stock, as stocks with a dividend payment can still decrease in stock price, it should definitely be considered!
Stocks: The Basics