How Much Should You Earn From Dividends? Learn the 7 KEY Elements of Dividend Investing, Dividend Yield, Dividend Payout, Ex-Dividend Date, and more.
1. What are Dividends?
Of the 6000+ stocks currently available to purchase on the major U.S. indexes circa 2800 companies currently offer a dividend payout.
A dividend is an offer from the company, confirmed by the board of directors, to pay out a portion of its income (after tax profits) to its shareholders.
These companies tend to be well established with a stable income stream enabling them to offer a constant & consistent dividend.
The dividend is essentially a reward to the shareholder for holding the stock.
2. Types of Dividend
- Regular Cash dividend, the most common type of dividend payment, usually released quarterly.
- Extra dividend, a special dividend usually a large one-off payment to shareholders
- Liquidating dividends usually paid if there are any left-over or allocated funds during the company’s liquidation.
- Preferred Dividends are paid out to preferred shareholders, find out more about this special preferred dividend
- Qualified Dividends apply to both Common Stock Dividend and Preferred Stock Dividend.
Regular dividends can also become Qualified Dividends and subject to lower Capital Gains Tax, rather than Higher Income Tax. If you are serious about investing for dividend income you will want to read What Is Qualified Dividend? How can you take advantage?
3. Dividend Payment
The dividend payment is usually expressed in dollars per share.
This means if I own 100 shares of a company whose stock price is $200, if the company pays out $5 per share then I will receive 100 X $5 = a $500 payment. Usually, this is distributed on a quarterly basis, meaning I will receive $125 per quarter.
Dividend Payment = Number of Shares X Payment per Share
4. Dividend Yield
Here is an example of the Dividend Yield. I own 1000 shares of ABC Company at a cost of $10 per share. ABC pays out a regular dividend of $0.50 per share. As a single share of the company is worth $10, $0.50 equates to a dividend yield of 5%.
Dividend Yield = Annual Dividend Paid / Stock Price
This 5% is essentially what you earn on your money regardless of stock price growth. Of course, if the stock price deteriorates during the period in which you hold the stock this may mean your net profit reduces. For example, you make a 5% profit in terms of dividend yield, yet the stock price has depreciated 5%. This means your net profit if you were to sell would be Zero.
5. Dividend Payout Ratio
This is the proportion of the Earnings per Share (EPS) that is paid out in dividends. For example, if a company earns $2.50 in earning for every outstanding start, and it pays out $0.50 per share in dividends, then the dividend payout ratio is 20%.
Dividend Payout Ratio = Dividends per Share / Earnings per Share
6. Ex-Dividend Date
This is the date 2 business days prior to when the dividend payment is scheduled.
For example, if you purchase a stock on April 24th and the company announces the dividend payment date is April 30th, then you will be entitled to the dividend. However, if you purchased the stock on the 29th of April, then the previous owner of the stock will receive the dividend.
7. What kind of Dividend Payouts Can You Expect?
Of the 5000+ stocks currently on the major U.S. Indices, approximately 50% of the companies pay out a dividend. Here are some interesting facts.
- There are 2800 companies paying a dividend
- Less than 0.5% pay-out a dividend of more than 10%
- 25% of the companies pay out a dividend yield of between 5% and 10%
- Less than 1% of companies pay a dividend of less than 1%
- This means approximately 74% of the companies pay between 1% and 5%
A reasonable expectation is that you should receive a dividend of around 5%.
Dividends can be a great way to generate a steady income from stocks, but beware, if a stock price is rapidly falling and the company is in trouble your net profit may not be as high as you expect.