How to Get Paid While Owning Stock: A Brief Primer in Dividends
Did you know that some stocks and exchange-traded funds (ETFs) will pay you money just for owning their shares? Welcome to the world of dividends!
What are Dividends?
Dividends are payments made to shareholders, by the company, usually in the form of cash at regular intervals. Most companies that pay dividends make the dividend payments quarterly, but there are a few companies and ETFs that pay dividends monthly.
It helps to think of dividends as either an interest payment, or a return on your investment in the company, i.e., a reward to the owners of the company.
For example, if you own 100 shares of a Company, and it pays a quarterly dividend of 20 cents per share, you will receive $20 every quarter that you own the stock. In one year, you could earn $80 from a Company for simply owning 100 shares of stock. In year 2, a Company may raise their dividend payment to 22 cents per share, and your dividend reward increases to $22 per quarter, or $88 per year. If this is a company that increases their dividend payment every year, you get rewarded more and more for every year you hold the shares.
That’s why we think dividends are worth your time!
Important Dates to Ensure You Receive A Dividend
It’s important to know that you cannot always buy shares and expect a dividend payment right away. There is strict recordkeeping being done on behalf of the company so that it can keep track of who does or does not qualify for dividend payments. The important terms to know are 1) declaration date; 2) ex-dividend date; 3) record date; and 4) payout date.
The declaration date is when the company’s board of directors announces the dividend payment that shareholders will receive.
The ex-dividend is the date by which a shareholder must own the stock in order to be eligible to receive the dividend payment.
To qualify for the dividend payment, it’s important you purchase the shares before the ex-dividend date. If you purchase the stock on or after the ex-dividend date, you will miss out on that quarter’s or month’s dividend payment.
The record date is the date a shareholder must be on the company’s records in order to receive a dividend payment.
The payout date is the date shareholders will receive the dividend payment into their account. The timing of when you will see this transaction will vary from broker to broker, but will typically appear no more than 24 hours after the payout date.
Not every stock pays a dividend, and for those that do, the dividend payments vary from stock to stock. To help assess the potential profit you may recoup for every dollar invested in a particular company, you’ll want to familiarize yourself with the phrase “dividend yield.”
A dividend yield is the price of the dividend divided by the share price of the stock. In other words, the yield is the dividend expressed as a percentage of the current share price. If a company has a $100 share price, and it pays a dividend of $5 per year (or $1.25 every quarter), then the dividend yield is 5% ($5 / $100 = 0.05 x 100 = 5%).
Dividend Reinvestment Plans (DRIP)
Ordinarily, shareholders will receive their dividend payments into their accounts as a cash transaction. Some brokers offer what is called a “Dividend Reinvestment Plan” or DRIP, which is a great feature that lets shareholders automatically reinvest the cash dividend they receive into incremental shares of the company that pays the dividend, at no additional cost or fee to the shareholder.
When the next quarterly or monthly dividend payment rolls around, assuming you’re still a shareholder, your dividend payment will be just a little bit higher than the last payment you received because you own a slightly higher share amount. This concept is similar to compounding interest because shareholders who incrementally reinvest the dividend into the stock will see both compounding share ownership and dividend payments.
The Bottom Line
Dividend investing can be a very helpful strategy in your investing journey. In order to do this, you’ll need to have a trading platform or broker that allows you to purchase stocks that pay dividends. Stash is an investing app that lets you start investing with just $5. This beginner-friendly platform gives you access to thousands of single stocks and ETFs that you can buy and hold for the long term. Robinhood and Public are two other fantastic trading platforms that offer a flexible, easy-to-use design without all the frills.
Finding the right dividend-paying stocks for your portfolio will take some time, but there are plenty to pick from. It’s important that you evaluate the company you are interested in investing in, including researching the company’s dividend payout history and whether the company has ever decreased or paused dividends and if so, for what reasons.
As with any investment in the stock market, dividend investing is not without its own set of risks. Companies may cut dividends or reduce dividends for a variety of reasons. Additionally, the stock price might decrease for a while even if the dividend remains the same. You’ll need to evaluate your personal risk tolerance for stock market investing before proceeding.
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