Dividend-paying stocks can offer an efficient way to invest, but you’ll need to understand a few critical factors to succeed. First, not all companies pay dividends. In fact, dividend payers tend to cluster in specific sectors and industries.
In this article, we’ll discuss how to know if a stock pays a dividend and how dividends work. Dividend investing isn’t for everyone, but it can be a consistent source of income. We’ll go over more about how to know if a stock pays dividends, learn the answer to “How do dividends work?” and “When are dividends paid?” as well as how to know if a company pays dividends in this piece.
How to Know if a Stock Pays Dividends
How do you know if a company pays dividends?
You won’t need to spend much time figuring it out. Dividends are declared by a company’s board of directors and entered into the public record. You won’t need to comb through company press releases or earnings reports for this information.
Go to MarketBeat and look up a particular stock. In this case, consider Costco (NASDAQ: COST), the wholesale retailing giant. You’ll see a number at the top of the page labeled “dividend yield.” The dividend yield is the annual amount of the dividend being paid out as a percentage of the share price.
A stock price of $503.86 and a 0.67% dividend yield means a payout of $3.38 per share owned annually. This $3.38 is the total annual payment amount, but companies may split this amount into two biannual payments or four quarterly payments.
When looking for quality dividend stocks, consider how long the company has been paying the dividend and how often it increases. Companies that consistently raise dividends are the most reliable since they have a track record of profitability.
Why Do Companies Pay Dividends?
Companies pay dividends for a few different reasons. Companies will have decisions to make with their profits. For example, some companies focused on growth or expansion choose to take any excess profits and put them into research and development or other investment opportunities.
If the potential growth opportunities don’t match the company’s goals, they may choose to return these profits to shareholders. Dividends come from excess profits that the company decides not to reinvest in the firm. Instead of reinvestment, dividends are paid to shareholders as a reward for holding company common stock.
Dividends help control what the National Bureau of Economic Research refers to as an agency problem. According to NBER, paying dividends instead of holding all profits as retained earnings gives more agency to shareholders instead of managers. By returning profits to shareholders, managers are less incentivized to spend the retained earnings on potentially unsuccessful ventures.
How Dividends Are Paid Out
How are dividends paid? How dividends are paid varies depending on the company issuing them. Most dividends are paid in the form of cash, which will be deposited in the brokerage account where the shares are held. Some companies choose to pay dividends in the form of shares instead of cash, but most simply pay cash. Dividends can also be reinvested efficiently by investors through a dividend reinvestment program (DRIP).
When Are Dividends Paid Out?
How often are dividends paid? When dividends are paid out also differs depending on the company. In most cases, the dividend will be split into four quarterly payments, deposited into an investor’s brokerage account on the specified payout date. However, some companies will pay dividends annually or biannually.
It’s a good idea to understand the payment structure of your dividend stocks to avoid any potential tax headaches. Now and then, you’ll encounter a company that offers a special dividend, which is outside the typical dividend distribution structure. Learn more about special dividends.
How Are Dividend Amounts Determined?
Dividend payment amounts are determined by a company’s board of directors and voted on by shareholders. A dividend is typically reported as a percentage of the company’s share price. When determining the dividend amount, companies consider their earnings, outstanding obligations and the potential return from specific projects or investments. Long-term profit expectations are also considered. Using all this information, a company’s board will calculate a dividend amount and propose it to shareholders for a vote.
Important Dividend Dates
Shareholders must mark a few important days in order to maximize their dividends. According to Investor.gov, there are four key dates to remember when investing in dividend-paying stocks. Here they are in sequential order:
The declaration date is the first one of which investors should be aware. On the declaration date, the company announces to the public how much the dividend will be, when they will pay it and when investors must hold shares to receive it. The declaration date requires no action on the part of shareholders — it’s simply a company information notice.
Here’s the big one. One of the dates announced during the declaration date, the ex-dividend date occurs when shareholders are no longer eligible to receive a dividend. In order to ensure receipt of a dividend, you must own shares before the ex-dividend date. For example, if a company’s ex-dividend date is November 30, then investors must be in possession of shares by November 29 to receive the dividend. You don’t even need to hold the shares for longer than a day as long as you own them before the listed ex-dividend date. If you purchase shares on the ex-dividend date, you won’t receive the dividend — the seller will.
The record date usually trades on the trading day following the ex-dividend date. Record dates are essential because stock trades don’t settle immediately on an exchange. It takes two days to settle stock trades properly, so the record date is when all settled transactions go into the “record book” of the company paying the dividend. Because of this process, investors must own shares before the ex-dividend date, otherwise the exchange won’t process the trade in time for dividend eligibility.
Here’s an easy one. The payout date means the date on which dividends are dispersed to all shareholders of record. You’ll have the dividend deposited into your brokerage account if you own shares before the ex-dividend date. Dividends are paid in cash or in additional shares if you participate in a dividend reinvestment plan. More on those below.
Dividend Reinvestment Plan (DRIP)
A dividend reinvestment plan is a simple and efficient way to take dividend payments and reinvest them into more shares. Under a DRIP, dividends will be automatically used to purchase additional shares (or fractional shares) directly from the company.
By purchasing shares directly from the company, investors avoid transaction fees like commissions and spreads. Occasionally, some companies offer these particular shares at a discount to the current price. Note that these dividends reinvested through a DRIP are still taxed as if they were typical cash payouts. You can only redeem those shares with the issuing company; they are not sold on an exchange.
Example of How Dividends Work
If you want to start investing in stocks that pay dividends, here are a few short steps to follow:
Step 1: Determine which stocks pay dividends.
If you want to benefit from dividends, you must know how to figure out if a company pays dividends at all. How do you know if a stock pays dividends?
A company’s board will announce dividend payments, and potential buyers can find information about dividends on the investor page of the company’s website or through a site like MarketBeat, which features the dividend yield, payment frequency and the history of dividend increases or decreases.
Some companies may also pay out special dividends. Learn more about special dividends as well as companies that continue to increase their dividends.
Step 2: Figure out how much the dividend pays.
Finding out how much the dividend payout will be can be done by taking the dividend yield and dividing it by the price of the shares. For example, a company with a $500 stock price may announce a 3% dividend. In this case, 3% of $500 is $15, meaning that the annual dividend amount will be $15 per share owned by the investor. An investor owning 100 shares will receive $1,500 worth of dividends annually.
Step 3: Learn when and how the dividend pays out.
Dividend payments vary depending on a few different factors. First, you’ll need to determine the frequency of the payout. Does the company pay dividends monthly, quarterly, biannually or annually?
Second, will the dividend pay out in cash or additional shares? Having the answers to these questions will be important not just for your overall portfolio but for your future tax returns as well.
Once you’ve identified the dividend stocks you want to buy, you must purchase shares before the ex-dividend date. As long as you own shares the day before this date, you’ll be entitled to the dividend, even if you sell your shares before receiving the dividend payment.
Dividends are payouts from a company’s profits that go to shareholders as a reward for holding shares. But before buying up all the companies with the highest-yielding dividends, take time to understand the pros and cons of this investment style. Dividends tend to be paid by established companies with less of a tilt toward growth, so outsized stock price gains aren’t often in the cards. You may also want to evaluate the option of investing in cheap dividend stocks.
However, dividends are still nice perks, especially for investors who depend on income from their holdings. Common stocks aren’t the only ones paying dividends; mutual funds and ETFs often pay dividends too. One popular method of dividend-stock investing is buying the S&P 500 Dividend Aristocrat Index, composed of companies that have raised their dividend payouts for 25 years or more. However you decide to invest, carefully research your potential holdings and formulate a plan based on your time horizon.
Are you looking for more information on dividend stocks? Here are a few commonly asked questions about investing in these particular companies.
How do you know if you receive dividends?
You must own the shares by the closing bell of the trading day before the company’s ex-dividend date. As long as you own shares before this date, you’ll be eligible to receive the upcoming dividend. You can purchase shares the day before the ex-dividend date and sell them on the ex-dividend and still qualify for the payout. Ex-dividend dates are almost always listed alongside information like stock price, market cap and the date of the company’s next earnings report.
Do all stocks pay dividends?
No, not all stocks pay dividends. Dividends are usually paid by established companies seeking to return excess profits to their shareholders instead of reinvesting them into the company. New companies with growth-oriented mindsets tend to refrain from paying dividends. You can count on the Dividend Aristocrats to pay out regular dividends, for example. They are well-established companies, also known as dividend achievers.
How long do I have to hold a stock to get the dividend?
You don’t need to hold stocks for long for dividends to be paid. You simply need to hold the shares overnight before the scheduled ex-dividend date. If you purchase a company’s shares five minutes before the closing bell the day before the ex-dividend date, you’ll receive the dividend even if you sell the shares the next day.
How do you find the dividends paid?
Dividends will be paid to the account where shares are held, either as a cash payment or additional shares. As long as you had shares before the ex-dividend date, you should find shares in your brokerage account on the payout date.