What are dividends?

Dividends are pay­ments some com­pa­nies make to share­hold­ers.

Owning shares of stock in the com­pa­ny make one an own­er, and as such, they receive these pay­outs. Dividend pay­ments are not nec­es­sar­i­ly prof­its, as div­i­dends are gen­er­al­ly more sta­ble than prof­its.

Paying a div­i­dend is often thought of as some­thing done by com­pa­nies when they don’t have any­where bet­ter to invest the com­pa­ny’s cash. Maybe this is true but is miss­ing the point. Some com­pa­nies decide to pay div­i­dends, oth­ers don’t.

Dividends as an indicator of the company’s future

Once com­pa­nies start pay­ing div­i­dends, the mar­ket gen­er­al­ly views it unfa­vor­ably if there’s a lot of uncer­tain­ty about the div­i­dend. So, com­pa­nies are con­ser­v­a­tive about start­ing a div­i­dend because stop­ping it often is a neg­a­tive sig­nal about the com­pa­ny’s future. They’re also con­ser­v­a­tive about the pay­out so they don’t have to reduce the div­i­dend to fund oth­er impor­tant projects that may arise.

Because of this point of view, that a com­pa­ny’s future is indi­cat­ed by the health of the div­i­dend once start­ed, when a com­pa­ny does­n’t have prof­its it can con­tin­ue to pay div­i­dends.

On the oth­er hand, increas­ing div­i­dends is viewed as a pos­i­tive tell about the future of the com­pa­ny. In fact, there’s even a class of com­pa­nies that have raised div­i­dends every sin­gle year con­tin­u­ous­ly for 25 years or more. They’re called div­i­dend aris­to­crats.

Dividend’s impact on share price

What real­ly mat­ters as an investor is that if you own a share of stock that pays a div­i­dend, you receive a div­i­dend pay­out. While you receive the div­i­dend pay­out, it does not affect your own­er­ship. If you own one share of stock before the div­i­dend is paid after the div­i­dend is paid you still own that share.

In the­o­ry when the pay­out is paid the price of the stock is reduced by that amount. However, in prac­tice, it’s hard to see the impact of div­i­dend pay­ments on the share price because stock volatil­i­ty (the up and down changes in stock prices) hides the impact except per­haps in one case.

Sometimes com­pa­nies choose to pay a “spe­cial” div­i­dend. If they’ve accu­mu­lat­ed cash but have no use for it, it’s often not help­ful to keep it on the com­pa­ny’s bal­ance sheet (for rea­sons beyond the scope of this post) so they return the cash to share­hold­ers in one lump sum. Because spe­cial div­i­dends are typ­i­cal­ly larg­er than reg­u­lar div­i­dends, it’s more like­ly to see the impact on the of the div­i­dend dis­tri­b­u­tion on the price of each share.

Dividend payment schedules

Dividends are usu­al­ly paid quar­ter­ly. I find that the most accu­rate site to use to see a com­pa­ny’s div­i­dend sched­ule is the Nasdaq quote site. Enter a tick­er sym­bol to get that com­pa­ny’s sched­ule. A tick­er sym­bol is a code used to iden­ti­fy the com­pa­ny. If you don’t know what a tick­er sym­bol is, take a look at Apple’s div­i­dend sched­ule.

Dividend investing is fun

I have always found one of the most fun things about invest­ing is get­ting a div­i­dend. It’s hard proof that my mon­ey is mak­ing mon­ey.

This is espe­cial­ly true for kids who get a kick out of the idea that they own a piece of the com­pa­nies whose prod­ucts they’re famil­iar with, such as Disney, Apple, or McDonald’s.

Read more

This post was writ­ten as one of the foun­da­tion­al posts to help you under­stand some invest­ing basics. There are four more foun­da­tion­al posts I rec­om­mend read­ing:

• What does it mean to rein­vest div­i­dends?
• What are the div­i­dend aris­to­crats?
• How do you get start­ed?
• What do you mea­sure?