DEMYSTIFYING DIVIDENDS

Transcription

1 DEMYSTIFYING DIVIDENDS

2 1 by David Peltier Most investors understand the benefits of investing in dividends, but not everyone understands the mechanics behind them. It s one thing to buy good dividend stocks, but it s another to understand when and how those dividends are paid. With that in mind, here s a quick lesson on basic dividend concepts and terms for new investors or for those looking for a refresher. When investing in dividends, the most important concept is of course the dividend itself. What exactly is the dividend? When a company offers dividends, it means that at some point during the year, a certain percentage of the share price will be paid out to those who bought stock in that company. This percentage is referred to as the yield. What is the yield? If someone says a stock has a 3% dividend, this is called the yield. The yield is the ratio of the annual payment to the current share price (annual dividends per share divided by current price per share). Annual Dividends Per Share = Yield Current Price of Share The yield is not a constant as it depends on the current stock price of each share and the actual payout or dividend. When the payout remains the same no matter what the price of the share, the yield will always move in the opposite direction of the stock price. In other words, when the stock price goes up, the yield goes down, and vice versa. For example, a company with a share price of $20 and an annual Number dividend 1 of $1 a share, yields 5%. If the stock price falls to $18 and the payout remains the same, the yield will rise to 5.6%. If the stock moves up to $22, the yield will drop to 4.5%. ABOUT THE AUTHOR Meet David Peltier, Portfolio Manager Dividend Stock Advisor David Peltier joined TheStreet, the leading financial information and investment resource firm, as a research associate in August In addition to Dividend Stock Advisor, he also writes and manages the very popular Stocks Under $10. David has managed products that covered deep-discount value investing and used dividend stocks as part of a retirement savings portfolio. Today, thousands of investors from individual to institutional rely on him for his expertise and insights into high potential, long-term investing strategies and stock picks. David graduated from New York University s Stern School of Business with a degree in Finance. Prior to TheStreet, he was an analyst for Individual Investor magazine and its website. In addition to his regular video appearances for TheStreet, he has been a guest on NPR, Nightly Business Report, CNNfn, WNYW-TV and presented at The Money Show. David also hosts a live monthly chat on Twitter (@davidspeltier). Starting share price $1/$20 = 5% Stock price falls $1/$18 = 5.6% Stock price rises $1/$22 = 4.5%

3 2 Another important mechanism of investing in dividends is the timing of the payouts. Dividends are generally paid on a quarterly basis and can be raised, cut or eliminated at each interval. Again, investors should be most interested in firms that consistently and steadily raise their payout because there is a greater chance of a good payout. Companies whose payouts fluctuate are a bigger investment risk because at any point the yield may diminish to vanishing point. Must-Own Date The one question I hear most often about dividends is when do I have to buy a stock in order to receive the payment? The answer is more complicated than you would think. Aside from the payout date, investors should understand about the ex-dividend date. It is an often-heard phrase because it is an important factor in dividend investing. Investors who want to take advantage of a good offer need to buy a stock before this date to qualify for the dividend in that given period. I call this the must-own date. essence, the payout date is three days after the announced record date. The ex-date, on the other hand, occurs two trading days before the record date, so if you know the record date, you can determine the ex-date. The must-own date, therefore, is the day before the ex-date, or three trading days before the record date. If you purchase stock on or after the ex-date, you re too late, and the stock you re buying is considered trade ex-dividend, or outside the offered dividend for that period. To illustrate: Say you hear of a sweet deal with Company X, whose record date is on March 15 for that period. You know then that the ex-date is March 13, and the must-own date is March 12. So if you want in, you must buy stock on or before March 12. Buying it on March 13 disqualifies you from receiving the payout. The company doesn t give you this information when the dividend is announced and it s not published on the quote pages of TheStreet.com, Yahoo Finance or even the expensive Bloomberg terminal on my desk. I coined the term must-own date several years back because it captures the essence of the concept, and its important enough to have a layman s term. Terms like record date and ex-date are commonly thrown around in dividend parlance, but the must-own date is the simple answer that most folks want to drill down to. Even if the must-own date is not given out by companies, there is a way to determine the must-own date for any dividend, so you ll never be confused by this important question again. First, when most dividends are announced, the company generally says it is payable to shareholders of record on a certain date. This is then the record date. This is useful information, but investors often confuse the record date as the cutoff to receive the dividend. In fact, stock trades actually settle three days after the fact, even if you re a frequent trader that buys and sells the same name several times a day. So in Another way to determine the ex-date is checking on the opening shares of a company. If a company pays out 20 cents a share every quarter, all other things being equal, the shares would likely open down about 20 cents lower on the ex-dividend date because buyers that day will not receive the income. But by then it ll be too late to be part of the conversation. Number 1 The dividend itself is usually not paid out until two to four weeks after the ex-dividend date. This means that on or any

4 3 time after the ex-dividend date investors can sell shares and still receive the payout, even though the stock is no longer in their account. Conversely, when an investor misses the must-own date, he will not be entitled to the dividend for that period even if he still holds the stock. So there it is, the most basic (and important) concepts in investing in dividends in a nutshell. Remember that when investing in dividends, it s not enough to know what a good investment is; you also need to know when to buy. Until you do, don t quit your day job. Number 1

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