Introduction to Dividend Stocks

Investing in dividend-paying stocks are a great way to build long-term wealth. Below, you'll find introductory information about dividend stocks. In later sections, we will cover more advanced topics, such as dividend yield and dividend reinvestment programs (DRIPs).

How do dividends work?

This means that for every share of a stock that you own, you are paid a portion of the company's earnings. For example, Let's say Company X pays a yearly dividend of $0.20. Most companies pay dividends quarterly (four times a year), meaning at the end of every business quarter, the company will send a check for 1/4 of $0.20 for each share you own.This may not seem like a lot, but when you have built your portfolio up to thousands of shares, and use those dividends to buy more stock in the company, you can make a lot of money over the years. The key is to Re-Invest those Dividends!

What are cash dividends and one-time dividends?

Cash Dividends
Regular cash dividends are those paid out of a company’s profits to the owners of the business (i.e., the shareholders). A company that has preferred stock issued must make the dividend payment on those shares before a single penny can be paid out to the common stockholders.

Special One-Time Dividends
In addition to regular dividends, there are times a company may pay a special one-time dividend. These are rare and can occur for a variety of reasons such as a major litigation win, the sale of a business or liquidation of a investment. They can take the form of cash, stock or property dividends. Due to the temporarily lower rates of taxation on dividends, there has been an increase in special dividends paid in recent years.

When do dividends get paid?

Dividends must be declared (i.e., approved) by a company’s Board of Directors each time they are paid. There are three important dates to remember regarding dividends.

  • Declaration date: The declaration date is the day the Board of Director’s announces their intention to pay a dividend. On this day, the company creates a liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date.
  • Date of record: This date is also known as “ex-dividend” date. It is the day upon which the stockholders of record are entitled to the upcoming dividend payment. According to Barron’s, a stock will usually begin trading ex-dividend or ex-rights the fourth business day before the payment date. In other words, only the owners of the shares on or before that date will receive the dividend. If you purchased shares of Coca-Cola after the ex-dividend date, you would not receive its upcoming dividend payment; the investor from whom you purchased your shares would.
  • Payment date: This is the date the dividend will actually be given to the shareholders of company.

A vast majority of dividends are paid four times a year on a quarterly basis.

What exactly is a stock dividend?

A stock dividend is a pro-rata distribution of additional shares of a company’s stock to owners of the common stock. A company may opt for stock dividends for a number of reasons including inadequate cash on hand or a desire to lower the price of the stock on a per-share basis to prompt more trading and increase liquidity. This is basically where the term “stock split” applies.

Next Section: Dividend ReInvestment Plans (DRIPs) »