What is a dividend stock?
Payment from the company to the existing shareholders in the form an additional stock based on their proportional holding. Distribution to shareholders in this form increases the total number of outstanding shares of the company while retaining the percentage of individual shareholders. Stock dividends are usually paid when a company wants to reward its owners while maintaining its cash balance. Through stock dividends are often compared with stock split, but they come with a holding period (to qualify for tax treatment) and have different accounting procedure.
Usually matured companies prefer this way for payment as they have less room for growth, which means lower levels of investments that allow the management to pay relatively higher dividends. They are mostly paid to increase the liquidity and lower the per share price in the market.
FAQs related to Dividend & Dividend Stocks
Type of distribution which a company makes to its shareholders which is separate from the regular dividend cycle. It is declared as a one-off case and is distributed on the occurrence of events such as- a company having exceptionally strong earnings or if the company is planning a change in its financial structure.
Companies announce dividends at the time of results disclosure. The amount of dividend is made public on the same day along with the important dates, namely Ex Date, Record Date and Pay Date.
Ex Date: It is the date that decides the dividend entitlement for the shareholders of the company. To be eligible to receive dividend a shareholder should be the owner of the company before this date. This date is one working day before the record date.
Record Date: The company closes its shareholder register to determine the entitlement of the dividend that was announced.
Pay Date: On this date, the company makes payment to the shareholders.
|Record Date||Ex-Dividend Date||Date Payment||Dividend Amount|
An investor needs to be a shareholder of the company on Ex Date to receive dividend payment, meaning that the individual will not receive dividend payment if shares are bought on or after Ex Date.
To receive dividend, an individual needs to buy shares of company, which has declared dividend, before Ex Date. Although, a shareholder who has sold its shares on Ex date is eligible to receive dividend.
Suppose a company declares $2 of interim dividend and you had 1000 shares of the company before the Ex-Date. You will be entitled to a dividend payment of $2000 (1000*2), excluding any tax or refunds.
In this case, you will need to contact the company where you have share trading account, and the company will solve your query.
Generally, it depends on the business conditions, profits, and cash flows of the company. Although dividends stocks usually have favourable conditions, these three conditions of any company play a very important role to determine that the dividends would be safe. However, it could not be said that dividend stocks are risk-free investments as the business conditions, profits, and cash flows continuously change.
A financial ratio expressed as a percentage to show the company outflow each year in the form of dividends relative to its stock price. It moves in reverse direction to the stock price. The yield increases when stock price falls and vice versa, assuming the dividend paid is always same.
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It is reverse of dividend yield. Payout is expressed as a ratio of total amount of dividend paid to the shareholders in relation to the net income of the company.
All companies do not pay dividends. Dividends payments are sourced from the income of the business, which is influenced by a range of fundamentals, including business stage, liquidity, cash flows, industry outlook.
No, it’s not appropriate to solely rely only on dividends, which can be volatile. One should continue to have liquid investments and cash for the near term and emergency. Dividends are a part of your income from investments, and it is appropriate to rely on multiple sources of income from investments.
It is not foolish to invest only in dividends stocks. But one should have diverse investments in a portfolio for better return and risk management.
Not just in Australia, but across the board, a matured business that is growing in line with industry trends, having strong cash flows, minimal reinvestments needs and financial obligations will likely pay a higher dividend.
Investors usually find high dividend shelter in large businesses with resilient cash flows, but businesses, which invest heavily at present or strong future cash flows and growth, are also preferred by them.
A good business with sustainable cash flows and a promising industry outlook is likely to pay a decent dividend. At the same time, the business must be equipped with resources to improve the cash flows overtime.
Cash generative industries like consumer staples, telecommunications continue to have reliable dividends. But there could be many businesses with sustainable cash flows, thus with an ability to pay dividends.
In March 2020, Washington H Soul Pattinson & Company Limited (ASX:SOL) increased its interim dividend for the 20th consecutive period.