Dividend stocks denote part of a company's profits. Shareholders normally receive dividend payouts in the form of cash. Preferred stockholders normally receive payment first; shareholders with common stock receive payment second. However, if the company is low on cash or simply wants to increase its liquidity by lowering the price per share of its stock, it may chose to pay its shareholders additional shares of stock in lieu of cash payouts.
Payout ratio refers to the amount of revenue a company sets aside to pay dividends to shareholders. This ratio demonstrates "how well company earnings support its dividend payments," claims Stock-Research Pro. Dividend payout ratios are equal to the annual dividend per share, or earnings per share. By dividing the company's dividend by its net income, investors can figure out the necessary percentage of the company's net income to pay for the dividend. The board of directors must declare all dividend stocks before they become payable. When there is profit after the company reinvests the necessary funds into the business, the payout ratio applies.
The growth rate of dividends is the rate at which a company paying in dividends increases its dispensation, profit and payouts, annually. According to Stock-Research Pro, "a company's dividend growth rate can be estimated by projecting its earnings growth. The more income produced, the higher the value of stocks and therefore, the higher the payouts for dividends; a situation known as a "double-dip". When calculating growth, investors assume that a company's equity returns and payouts hold year to year. The formula for growth rate is the plowback ratio multiplied by the return on equity. The plowback ratio is the amount of reinvested dividends before payouts occur. When a company experiences loss during the specified timeline, the ratio is undefined. To get the plowback ratio, simply subtract the dividend payout ratio from one.
Every company designs its own dividend calendar. There are several important dates to note. The first is the declaration date; on this day, the board of directors announces its intent to pay on dividends, creating a binding obligation to pay its shareholders. After the declaration date, the company must review its records to confirm its shareholders. According to Dividendstocks.com, since stock normally begins trading ex-dividend on the second business day before the record date, "only the owners of the shares on or before the ex-dividend date will receive the dividend." Ex-dividend dates denote the day a stock trades without the dividend; on the ex-dividend date the price of stock lowers by the amount of the dividend for the market opening. It is of the utmost importance to make investors aware of the ex-dividend date of their stock. Lastly, the payment date is the day that dividends pay out to shareholders. Most dividends pay quarterly or semi-annually, though some pay only once a year or on a monthly basis. Some companies have no schedule for paying dividends; unscheduled dividends are "irregular" dividends.
Advantages and Risks
Purchasing dividend stocks is very advantageous for a number of reasons. Dividend stocks result in lower payments over time, as the investor receives regular payments per share every quarter. During an unstable stock market, investors with dividend stocks experience a greater security and continue to build income. Dividend stocks help keep companies on track by holding them accountable to their shareholders. Double-taxation, levied both when created and when transferred to the investor, is one drawback of dividend stocks. When purchasing dividend stocks, investors risk the company failing and losing all payouts. For this reason, scrutinize a company's dividend history, balance sheet, and cash flow.
- Dividendstocks.com: Introduction to Dividend Stocks
- Great Option Trading Strategies; Dividend Stock Investing: Brad Castro
- Prevention-Dividend.com: What Are Dividend Stocks?
- Stock-Research Pro; Calculate the Estimated Dividend Growth Rate For A Stock; June 2009
- ADFN; Operating Ratios-Profitability Ratios; Plowback Ratio
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