Companies that make profits will sometimes return them to shareholders in the form of a dividend payment. Investors that own the company stock will be given dates on when dividends are issued and a dividend-per-share rate. A simple calculation will compute a shareholder's dividend payment. Other calculations can help investors evaluate the productivity and consistency of a corporation’s dividend payment.
Important Dividend Dates
When a corporate board of directors issues a dividend, three dates are relevant. There is the declaration date, when the board decides that it will issue a dividend and declares how much the dividend will pay. The next is the ex-dividend date, which is perhaps most important to investors, as that is the date before which the stock must be purchased in order for a shareholder to receive the dividend. The third date of relevance is the record date, which is when shareholders are paid their dividends. It usually occurs two days after the ex-dividend date.
Calculating Dividend Payments
When dividends are declared by the company, it will issue the dividend figure as a total payment and also as a dividend-per-share, which is more useful for an investor. Shareholders can calculate the dividends on shares they own by multiplying the dividend-per-share by the number of shares in their portfolio. If an investor holds 500 shares of a stock of a corporation that issues a $0.40-per-share dividend, the stockholder will receive a payment of $200. Some companies will pay dividends every quarter, while others will only issue dividends periodically. Dividends are usually issued by mature companies that have achieved steady growth. Smaller companies that are still growing will usually reinvest profits back into their operations, which can result in higher earnings for corporations and higher share prices for the investor.
A dividend-paying stock’s productivity is measured by its dividend yield, which is calculated by dividing the current share price by the annual dividend-per-share price. According to Forbes, many stocks with high dividend yields are issued by large corporations with high capitalization and recognizable brand names, often called blue-chip stocks. Forbes identifies several stocks with high yields that ranged from 2.78 percent to 4.15 percent. MarketWatch characterized dividend yields of over 4 percent as “mega dividends.”
Dividend Payout Ratio
Another useful calculation for dividends is the payout ratio, which shows investors how much of the corporation’s net income is distributed back to shareholders in the form of dividends. The payout ratio is calculated by dividing the corporation’s dividend-per-share by its reported earnings-per-share. Stocks with high ratios are doing less reinvestment into the company, which can stoke worries in some investors that the dividend will drop or disappear if the company’s earnings drop. Investing website Scottrade writes that stocks with lower payout ratios are more likely to offer a consistent and reliable dividend for investors that count on steady income from the stock.
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