What is a Dividend?
Dividends are payments received by investors for owning shares of a particular security.
Think of dividend payments as the company paying some of its profits directly to shareholders.
Dividends are usually paid out on a per share basis, meaning you get a certain payment for each share you own.
For example, Intel currently pays $.225 for each share per quarter, or $.90 ($.225 x 4) per share each year.
This information can be found on nearly any financial or broker website. The image below comes from yahoo finance.
(Click to enlarge)
Yahoo Finance, Google Finance and others may list the annual dividend ($.225 x 4 = $.90), others may list $.225 per quarter as Scottrade does, as shown below.
It is important to note that a company may change or cancel its dividend at any time.
During periods of a bad economy or slowing business, dividend payments may not be paid out in order to conserve cash for the company. During times where business is doing well, a company may increase its dividend, or offer special one-time dividends.
To see historical dividends paid out by a company on Yahoo Finance;
- click “Historical Prices” on the left hand side of the page
- select the “Date Range”
- select “Dividends Only”
- then select “Get Prices”
This will give you a list of all historical dividends the company has paid out. Has the company had to lower the dividend lately or has the company missed a dividend payment? Maybe the company has had a long history of paying and raising the dividend (As we see with Intel below)?
This data can be used by investors to determine how “safe” a dividend payment is. If a company has a long history of increasing and paying out a dividend, investors may feel more comfortable assuming the dividends will continue. If a company has frequently lowered or halted its dividend, investors should be wary on expecting a predictable dividend payment in the future.
As a side note and fun fact – at time writing, General Mills (ticker GIS) holds the record for the longest consecutive dividend payment streak. General Mills has been paying a dividend for 113 years and counting! An investor over the last 30 years has received over $15 per share in dividends alone, before accounting for the increase in share price:
Truly showing the power long term capital growth made possible by patiently investing in financially strong, dividend paying companies!
In addition to individual stocks, many mutual funds and ETFs also pay out dividends based on the securities they hold. Mutual funds typically allow automatic dividend reinvestment as well, meaning the dividend payment immediately purchases additional shares of the mutual fund instead of being paid into the investors account as cash. Over long periods of time, investors can amass large amounts of shares and large dividend payments by patiently allowing dividend reinvestment and compounding interest to work.
How do investors determine if a company’s dividend is sustainable?
The most common evaluation metric:
Dividend Payout Ratio – which takes into account the company’s total profit and compares that to how much it pays out in a dividend.
We talk about how to find the dividend payout ratio, and other metrics to determine if a dividend is sustainable in our post here
Other notes on Dividends
There are many differing opinions on investing in dividend paying stocks. Historically reinvested dividends have been the primary source of returns for the stock market. Dividends also provide a certain “guaranteed return” from a stock. Over time the stock’s share price may drop, but at least the investor could have received some dividend payments over that time. Dividends may also provide investors a source of income during retirement.
Others argue that a company paying out a dividend is sacrificing future growth by not reinvesting that money into its business. Investors will notice that many small growth stocks do not pay a dividend, because they would rather put more money into growing the company.
Final words on Dividends
There is no correct, “one size fits all” approach to investing. A well balanced portfolio will mix some growth stocks in with large dividend paying stocks to give you the best of both worlds.
A stock should never be purchased based on its dividend payment alone.
Dividend Ex- Date
Dividend Payout Date