10 things to know about Dividend yield
A dividend is a process of sharing profits from their earnings to the shareholders. When a company generates profit accumulated, they tend to reinvest in the company or payout to the investors.
The company can invest the money earned in the bank or buy real estate or invest in buying some appliances. But when a company is already grown and have enough cash, they tend to pay back good dividend to their shareholders. Growing companies will not pay more dividends as they tend to reinvest in their business. Payment of the dividend will be declared during quarterly results after approval of the board of directors.
Once a dividend is declared to be paid on a certain date it is called a payable date. All the investor who holds the stock by record date (2 days before the payable date) will be paid with a dividend.
The dividend will be paid in terms of the face value of the company. The face value will be much lower than the price of the company. So do not confuse the percentage of dividend with the price of the stock. If a company announces a 100% dividend, they will payout face value price as a dividend.
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The dividend price will be generally reduced in the stock price on a date on which the dividend is paid out. As Dividend will impact earnings per share and net profit.
Types of Dividend:
Cash dividend: Most of the dividends (95%) will be paid as a cash dividend. The amount will be paid via wire transfer to banks.
Stock Dividend: Dividend will be paid in stocks in pro-rata. Rare way of providing dividends.
Special Dividend: Some random amount of cash paid out to investors which sometimes will be more than the profits. Some company provides all the cash reserves when providing special dividend/
If you want passive income, try and pick the high dividend yielding company and hold for multiple years. The capital paid will be return in 10-12 years with the price of the company multiple times higher than the buying price.
Terminology:
Dividend yield: It is the % of return paid as a dividend with respect to stock price.
Dividend%: The % of dividend with respect to the face value of the company.
Declaration date: The date which the company announces dividend/
Record date: Date which investor should hold the stock to get dividend paid.
Payment date: The date on which the company pays its shareholders.
Ex-Dividend date: To get the next dividend, an investor must hold the stock before this date.
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Personal advice:
Do not buy a high dividend-paying stock if you are a trader expecting value growth. Historically high dividend-paying company’s price increases at a lower rate compared to that of lower dividend paying company.
