Buying Stocks for Dividends? 7 Things You Need to Know

How Much Should You Earn From Dividends? Learn the 7 KEY Elements of Dividend Investing, Dividend Yield, Dividend Payout, Ex-Dividend Date, and more.

Are you thinking about investing for a regular income form dividend stocks? If so here are seven things you need to know.

7 Things You Need to Know About Stock Dividends
7 Things You Need to Know About Stock Dividends

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.

What Types of Dividends Are There?

  • Regular Cash dividend, the most common type of dividend payment, usually released quarterly.
  • The 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 in dividend income, you will want to read What Is Qualified Dividend? How can you take advantage?

What is 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 quarterly, meaning I will receive $125 per quarter.

Dividend Payment = Number of Shares X Payment per Share.

What is the Dividend Yield?

Here is an example of the Dividend Yield.  I own 1000 shares of ABC Company at the 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.

What is the 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

What is the Ex-Dividend Date?

This is the date two 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 April 29th, then the previous owner of the stock will receive the dividend.

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% payout 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.


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