How Dividends Make You Money
One of the ways to make money with stocks is by investing in companies that pay dividends.
Dividends are profits the company distributes to shareholders. The companies don't do this out of the kindness of their hearts—a company is about making money for the owners.
Dividends usually don't represent all of a company's profits. The company retains some portion for future use—in acquisitions or to retire debt, for example.
Most companies pay dividends in the form of cash, although you may hear of occasions when a company uses stock instead. Many investors are attracted to stocks with a good history of paying dividends. These companies are usually well established and profitable, but they may not offer much in the way of growth potential.
Stocks that pay dividends are attracting increased attention in 2019 because the escalating tariffs and trade wars and uncertainty they are creating in international markets is motivating some investors to seek out safety.
How Dividends Are Set
The company's board of directors sets the dividend at a quarterly meeting. It is important to note they are under no obligation to pay a dividend. If the company is hurting financially or the board is concerned about future prospects, it can forgo the dividend.
The board sets the dividend rate at a per share basis. For example, the board may declare a quarterly dividend of $0.50 per share. This means if you own 100 shares of stock, you will get a check for $50 for that quarter.
There are four important dates to remember about dividends:
- The Declaration Date: This is the date the board sets the dividend and announces when the stockholders will get their checks. The board also announces the Ex-Dividend Date, which is a very important date to know.
- Record Date: This is the date when the company sets the list of shareholders to receive the dividend. You must own the stock before this date to get the dividend; however, it is the Ex-Dividend Date that is more important.
- Ex-Dividend Date: This date usually falls 2 - 4 days before the Record Date. This date allows for the completion of all pending transactions since it usually takes three days to settle a regular stock sale. The Ex-Dividend Date is the most important date as far as owning the stock if you want to receive the dividend. On the Ex-Dividend Date, the market discounts the stock's price since the dividend is no longer available to buyers.
- Payment Date: This is the date the company mails the checks, often two weeks or so after the record date.
Types of Dividends
Dividends come in two types: fixed and variable. Dividends that pay at a fixed rate go to owners of preferred stock, while variable dividends go to common stockholders.
Dividends offer investors another way to make money, especially if the goal is current income. Many investors find that buying and holding companies with a good history of paying dividends makes good sense for financial goals.
Companies that pay dividends and have consistently stable earnings are most likely to offer consistency with their dividend payments as well. This helps with predictable income planning.
You can find dividend data on investment sites such as CNBC, Morningstar, Yahoo Finance, Morningstar, and Investopedia.