Dividends

Understanding what a dividend is can help investors to refine their ideas on stocks and rethink their assumptions about how a stock has to perform in order for it to be valuable to them as a part of their portfolio. Companies that issue stocks may from time to time or at regular intervals declare cash or stock dividends, or some combination of the two. This article focuses on cash dividends.

How Dividends are Declared

The directors of a company will get together to choose whether it will attach a dividend to its stock and how often it will be declared. Dividends that pay out every quarter are common because business financials tend to run in quarterly cycles - a good example of this is the trends in cyclical stocks. Annual or semiannual dividend payments are also out there but they are not nearly as common. When a dividend is declared by a company's board of directors, the board will make an announcement that the dividend of whatever amount they have chosen will be paid to shareholders who owned the stock on some targeted date and will be paid on some date in the future, sometimes called the payable date.

So anyone who wants to be paid that dividend would have had to be shareholders on the date in question. Those who bought that stock within the few days previous to the record date would miss out since three day settlements on stock trades are standard. But nevertheless, this is a pretty well universal mechanism for getting the word out about a dividend payout.

Predicting a Dividend Payout

On the day a dividend is paid out, investors can assume that the stock in question will be selling for its previous price less the dividend value. Predicting what that value might be is sometimes easy, but sometimes not so easy. For example, some companies announce to their shareholders a certain dividend value and they actually come out and say this is going to be the value every quarter until they say otherwise. So, if you know the history of that stock and you feel fairly confident that a dividend will be paid next quarter, you can reasonably assume that this expected dividend will be the same as the ones that have come before it. As the record date nears for the next quarter, stocks with stable dividend payouts can once again be expected to trade a bit lower, since the seller is essentially selling a virtually guaranteed payout along with the stock.

But things are not always so easy. Many companies do not declare a dividend every quarter. Some only do it every so often. And others try to declare one every quarter but they try to base it on the company's performance for that previous three month period. In this way, shareholders directly feel the ups and down of a company in an immediate way. And there are some companies who during times of financial transition temporarily suspend the payout of dividends.

Dividend Payment not a Guarantee

Preferred stock and stock that pays dividends are treated differently by stockholders than other stocks, because they produce income for the shareholder while being held. For other stocks, we have to buy low and sell high to make any money. But if a stock produces a dividend, it can be advantageous to hold it because it produces residual income without forcing us to surrender ownership. However, perpetual payment is never guaranteed. Things can and do change all the time, and dividends can come and go in a hurry. But they are great while they last. Stocks that pay dividends are loved by investors all over.

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