What Are Dividends?
Many investment articles and investment professionals always talk about dividends. How they can help you create wealth, how can they help provide income?
By the end of this blog you’ll be able to understand what a dividend is, its importance, and some examples of companies with great dividends.
WHAT IS A DIVIDEND?
A dividend is a portion of a company’s earnings that is distributed to the shareholders of the company, as an incentive to hold onto the company’s stock instead of selling once the price goes up. Dividends can come in the forms of cash, or additional shares of company stock. Generally, dividends are distributed quarterly (every 3 months) to shareholders. They are quoted in terms of dollar per share, or in percentage terms called the dividend yield. From the picture below from google finance, you can see it shows the dividend in dollar terms received every 3 months ($0.70), and in annual dividend yield terms (5.08%). What do these numbers mean? Well if you invested $10,000 in Bank of Nova Scotia for a year, you would receive $508 dollars of your original investment in one year without spending time working for that money.
One aspect to note however that is the dividend yield of a stock will change as the stock price moves up. For example, if the stock goes up, the dividend yield goes down.
POSSIBILITY OF DIVIDENDS DECREASING & INCREASING
One thing to be careful about when picking a stock to invest in, based on their dividend, is the companies’ ability to keep paying that dividend over time. With the recent oil pricing shock, many of the large oil corporations that people depend on for income have cut their dividends due to decreasing company profits. If the company is losing money, they will most likely decrease their dividend, and shift this money to the company instead of distributing it. An example of this would be Cresent Point Energy Corporation (CPG). In mid-2015, they had an incredible annual dividend of $2.76 per share, and with the price of oil eating away at their planned profits, they had to cut their dividend to $1.20. That’s a 57% decrease in the dividend, meaning people who invested for income in Cresent Point now have 57% less income. As you can see from the picture below, you can watch Cresent Point’s stock and monthly dividend fall. One point to note is that I did not compare the decrease in dividend yields, because as stock prices change so does the dividend yield, which would give false computations.
In contrast, it is more common for companies to increase their dividend yield to attract more investors, and keep current investors satisfied. For example, Royal Bank of Canada (RY) has an average dividend growth rate of 5.3% from one year ago. That means there annual dividend of $3.00 last year increased this year to $3.16, creating a dividend yield of 4.48%. To put this in perspective, if you had invested $1,000 in 2015, you would receive $44.80 now. If you left this investment for five years, you would have an extra $224 with little to no effort involved on your part. A growing dividend payout also shows the company is operating at a strong level, where it can continue to generate more profits and distribute them to shareholders.
SOURCE OF INCOME
Many people use dividends to provide an income for themselves. Many people who do this are retired, but there are also exceptions. If someone had $500,000 saved up for retirement and invested this into a high paying dividend stock such as Scotiabank mentioned in the beginning, they would receive around $25,000 a year which is a reasonable income given the low costs people have upon retirement.
DETAILS OF A DIVIDEND
A company dividend has many important details to pay attention to if you are thinking of investing with that company. First, is the declaration date, which will specify when the next dividend payment will be taking place. Second, is the ex-dividend date. This specifies when you would need to buy the stock by to receive the dividend. It is important to note this because if you are investing in a company because of its incredible divided, you will want to make sure you receive it that quarter by purchasing before the ex-dividend date. Next important detail is the record date, when the company determines which shareholders will receive the dividend. The record date is related directly to the ex-dividend date, usually being two business days after the ex-dividend date. The two day period is given because it takes three business days for a trade to settle; thus this doesn’t allow investors to buy the stock after the ex-dividend date is given, and to receive the dividend for only holding the stock in a significantly short period of time. Lastly is the payment date which specifies when the dividend will be paid.
Written by Mike Nesselbeck
Dividend Information taken from: http://www.dividendgrowthinvestingandretirement.com/canadian-dividend-all-star-list/
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