What is a dividend?
According to Investopedia “A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders.”
Dividends can be issued as cash, shares or other property.
So why are we interested in dividends? And how can they help us? Well according to Standard & Poor’s report dividends are responsible for 44% of the last 80 years of returns of the index. I don’t know about you but that caught my eye. Almost half of the returns people earned was due to dividends! I thought this might bear some looking into.
How do stock dividends work?
Dividends are a payout that a company will give back to people that own a part or share of their company. It can be in a form of cash, more stock or other property.
Dividends are usually paid out every three months and are declared before they are paid out. When a dividend is declared they also include the size of the dividend, the ex-dividend date and payment date.
To break these down a little bit. The size of the dividend will be declared which means that for example last quarter Wells Fargo announced they would be issuing a $.37 dividend for the quarter. So each quarter they announce the amount of money they are going to pay out.
The ex-dividend is typically two days prior to the record date, which is the date that you must own the stock. Investors need to buy the stock three days prior to the record date because it usually takes three days to settle any trade on the stock market. Since the ex-dividend date is two days before the record date the investor must hold the stock one day before the ex-dividend to received the payout.
The payment date is pretty obvious. This is the day that we get the money, stock, etc. It will be deposited into your brokerage account on that date. This is our favorite day!