Stock dividends explained
What is a dividend?
A dividend is the payment a trader receives from the company he/she is currently investing in.
The company pays the dividend from the profit it generates throughout its financial year. As a result, if the company fails to make a profit, dividends are not likely to be received by the investor.
The dividend is normally paid in two parts, an interim and a final dividend. This means if an investor has shares in a company for a year, they will normally get paid two lump sums a year (almost always in the form of cash).
To receive a dividend you must own the stock before the ex-dividend date. The dividend gets paid to the investor on the payment date set by each individual company, these dates can be found on a company's investor relations section of their official website.
Dividend Example
- if you own 200 shares in a company and they cost £10 each (£2,000 total) before the ex-dividend date
- and the company issues a dividend
of 10p
- you will be entitled to a payment of £20! ((£2000/£10)x0.10p)
By owning a stock before the ex-dividend date you will be entitled to the dividend regardless of whether you have owned the stock for 10 years, 11 months or 1 day!!
Note: Dividends are such a a good bonus that there are traders who only buy stock before the ex-dividend date and make their money on dividends rather than capital gains.
Find another great reason to trade stocks by checking out stop losses.
Dividend yield
The dividend yield (when referring to common shares) is the most recent full-year dividend / current share price. The figure is expressed as a percentage and indicates to traders the dividend they are likely to receive from trading a stock.
An easier way of looking at it is
-
The share price of a company is £10
- The company offers a dividend of 30p
- Therefore the dividend yield is 3%
- Meaning if an investor owned 1000 shares they would be entitled to a £300 payout!
If you are looking to receive a form of income other than capital gains (i.e. dividends) then the dividend yield figure will help you pick out the companies paying the highest dividend. A simple search on an Internet site will enable you to filter out the stocks with the highest dividend yield. All internet sites with practice accounts will enable you to search for this data.
Even better, if the site lists the ex-dividend date (which ADVFN.com does) then you can save a list of high yielding stocks with their ex-dividend date and trade each stock just before the ex-dividend date arrives! Unless the stock drops considerably then this is a very easy way of making money!
