One of the best things about being an investor is the possibility of receiving dividends. A dividend refers to the portion of a company’s earnings which it pays to its shareholders. These payouts are usually issued in cash, but investors can also get shares of stock or other property with tangible value.
For many investors, living off the income from dividends is the end goal of investing. In fact, during the early part of the 20th century, the main reason for investing in the stock market are the dividend payouts. Today, investors are more realistic with their goals as they look to invest to increase their wealth not only via dividends but also through capital gains.
For example, The Hershey Company, founded in 1800, is one of the most popular stocks in history. The chocolate company has withstood several shakedowns, from depressions to terrorist attacks to market bubbles, and has continued to pay dividends to its shareholders. On February 2017, the company marked its 87th consecutive year of distributing dividend payouts to stockholders, making it one of the best-performing companies in the stock market.
Important dates for a dividend
There are three important dates to keep in mind about dividends: the declaration date, date of record, and payment date. The declaration date refers to the day that a company’s Board of Directors announces their intention to pay a dividend. This payout will is recorded as a liability in the company’s books. Date of record and payment date are also usually announced by the Board on this day.
The date of record, also known as an ex-dividend date, is the date on which the company’s stockholders of record are entitled to the dividend payment. If, however, you purchased a company’s shares after the ex-dividend date, you would not be eligible to receive the future payment. But the investor from whom you bought your shares would. Meanwhile, the payment date is the day that the dividend will be given to the shareholders of the company.
As for how often a company pays dividends, it depends. But majority payout dividends every quarter. Other companies, like McDonald’s, pay dividends on an annual basis.
Types of dividends
Dividends take on different forms: cash dividends, property dividends, and special one-time dividends. Cash is the most common form of dividend payout. A property dividend is paid when a company distributes property to shareholders instead of cash or stock. This payment can take on the kind of cocoa beans, pencils, gold or any other item with a market value.
Then there are the special one-time dividends, which can be released to shareholders in addition to regular profits. However, these are rare and can occur for various reasons, such as the sale of a business, liquidation of an investment, or a big litigation win. These payouts can take the form of cash, property, or stock.
How to choose high dividend stocks
If you’re an investor and you want to put together a portfolio that generates high dividend income, check the company’s dividend payment history. It’s safe to say that companies with a continuous record of steadily increasing dividend payments over the past two decades or longer should be considered. Furthermore, the company has to be in a position to continue generating the cash flow necessary to make the dividend payments.
However, not all companies get to pay dividends to their investors. Startups and other high-growth companies, such as those in the technology sector, rarely offer bonuses. The reason for this is because these companies usually report high losses in the early stages of the company that they need to reinvest the profits to sustain a higher level of expansion. More established companies are often the best dividend payers.
It’s also important to know that some companies would not be able to pay a dividend because of bank loans, lines of credit or other kinds of debt financing place strict limitations on the payment of ordinary stock dividends. This restriction is disclosed in a company’s 10K filing with the SEC.