How Do Dividends Work?

If you’ve just started learning about investments and the stock market, there’s a good chance you’ve heard about dividends at least once in your life. It’s one of the most sought-after passive income streams. But do you know how they work or if they’re worth it? Keep reading to learn more:

What are dividends?

When companies pay a portion of their profit to stockholders, it’s called a dividend. They do that because they count on capital from investors to achieve goals and profit. However, you should be aware that not all companies pay dividends. 

What are the types of dividends?

  • Cash dividends: These are the most prevalent type of dividends. They’re paid in form of cash, and paid directly into the person’s brokerage account.
  • Stock dividends: In this type of dividend, rather than paying cash, the company gives the investor additional stocks.
  • Dividend reinvestment programs (DRIPs): Stockholders are able to reinvest the cash earned from the company’s dividends back into the company’s stock at a discount.
  • Special dividends: These are the types of dividends companies distribute when they have additional profit over a period of time that has no immediate use.
  • Preferred dividends: This type of dividend is only paid to preferred stockholders. Those who own preferred stocks do not have voting rights. They’re usually paid around the same time as cash or stock dividends, often having a fixed amount rather than variable.

Dividend Ex-Date vs. Dividend Payable Date – What’s the Difference?

The ex-date is basically when the books of the company will be evaluated, and stockholders will be paid dividends based on their total holdings. On the other hand, the dividend payable date is the period of time that the dividend earnings are sent to stock owners.

How frequently are dividends paid?

It depends on what the board of directors of the company decides, everything regarding dividends goes through an approval process. They can pay dividends annually, monthly, or quarterly.

How to Assess Dividends?

Dividend per share (DPS)

One of the most important things you should evaluate when choosing a dividend is the dividend per share. The reason why is because this formula is what directly translates to income for the shareholder. DPS is calculated by dividing the number of dividends paid out by a company by the number of shares outstanding.

Dividend yield 

The dividend yield, on the other hand, can be calculated by the company’s annual dividend divided by the stock price on a specified period.

Dividend payout ratio

The dividend payout ratio can be defined as the ratio of the total amount of dividends paid out to people who own stocks in relation to the net income of the company. Specialists advise you to be wary of companies who pay 100% or more of their income because that can risk could harm it.

Should you buy dividend stocks?

It depends on your strategy and portfolio. Many investors focus a lot on dividends for many reasons, such as to evaluate a company’s under or over evaluation. The majority of companies that offer dividends are well-established in the market, meaning they offer less risk. Some of these companies include Johnson & Johnson (JNJ), PepsiCo (PEP), AT&T(T), and JPMorgan & Chase Co. (JPM). 


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