Dividends can be a rewarding aspect of investing in stocks, providing shareholders with a steady income stream. Usually, dividends are paid out either in the form of cash, assets or stocks. Many companies may choose to pay dividends to their shareholders in case they make excess earnings. But how do you ensure you receive your dividends? This blog will explore why companies pay dividends, important concepts to consider when investing in dividend stocks, and the technicalities of receiving dividend payouts.

Who Benefits From Dividends?

The beneficiaries of such shares are preferred shareholders and equity shareholders. Preferred shareholders are entitled to a certain amount each quarter. Equity shareholders, on the other hand, can only get special dividends, profits accumulated by a company over several years.

Why Are Dividends Paid?

Availability of funds

If the company has made adequate profits, it can pay dividends to its shareholders.

Reinvestment

By paying dividends in the form of shares, the company can reward its shareholders and reinvest additional funds into the business.

Industry trends

Suppose the company’s peers have been regularly paying dividends. In that case, it must also keep up with the prevalent trends to keep shareholders from liquidating their holdings and moving on to competitor companies.

Concepts To Know Before Investing In a Dividend Stock

While identifying and investing in individual companies requires meticulous research on the part of the shareholder, there are a few things to keep in mind when looking at these different companies. Here, we discuss two critical metrics impacted by dividends:

Dividend payout ratio

A company's dividend payout ratio is the total amount of dividends in proportion to its net income or the percentage of total earnings paid as dividends.

A dividend payout ratio reflects how much the company is willing to give out to its shareholders compared to what it retains for its functions. A company's maturity, growth, expansion plans and debt determine whether dividends are paid out.

Dividend yield

A company's dividend yield reflects the dividends paid by a company compared to the share's price each year. You must consider a total of all the dividends paid during the year. This information can be retrieved from the company's cash flow statement for the relevant financial year.

How Do We Get Dividends on Shares?

Instead of repeatedly checking their bank accounts for their dividend payout, shareholders must become well-versed in the technicalities of receiving a dividend on their shares. Typically, companies send a cheque with the dividend amount to eligible shareholders within a few days of the ex-dividend date. Now, the amount is directly deposited in the bank account. However, sometimes a company may issue more stocks to their shareholders to reinvest the extra income in the company itself.

Important Dividend Payment Dates

If the company chooses to pay out cash, a shareholder needs to know the important dates associated with the payment of dividends.

Declaration Date

The date a company notifies its shareholders via a press release that dividends have been declared.

Record Date

When a company declares its dividends, it also sets a record date. It's when all eligible shareholders within the company's records are entitled to receive dividends.

Ex Date

Ex-date is the day before the record date. On this day, the share in question starts to trade ex-dividend. Anyone buying this share on the ex-date is not entitled to receive the dividend.

Payment Date

The date on which the actual payout occurs is usually one month after the record date. Shareholders expecting a dividend payout can check their bank balances on this date. These days, SMS and emails get sent out when the payment is going to be made.

Conclusion

Understanding how dividends work and the processes involved in receiving them is crucial for shareholders. By knowing the vital dividend payment dates, such as the declaration date, record date, ex-date, and payment date, investors can stay informed and ensure they receive their rightful dividend payouts. Keeping an eye on the dividend payout ratio and yield can also help make informed investment decisions.

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Frequently Asked Questions

1. How do you know if you have received dividends?

You will receive the dividends allotted on your shares on the payment date. This date occurs about a month after the record date. The amount will reflect in your primary bank account.

2. How do I track my dividends?

You can track the receipt of your dividends by monitoring the various vital dates. Now, most online trading apps also show the status of your dividends within themselves.

3. Will I get dividends if I sell them on the record date?

No, you will not be eligible for a dividend if you sell your shares on the record date. Only shareholders on the company’s record on this date will get dividends.

4. How long do I hold a particular stock to get dividends?

No lower limit exists on how long you should hold a stock to be eligible for its dividends. You need only purchase the shares at least two days before the ex-date.

5. Do stock prices go down after dividends are paid?

After the dividend gets paid out on the ex-date, the share price falls by the amount of the dividend paid out. Even when the company pays out dividends in the form of stocks, it dilutes its earnings.