What is a dividend?
A dividend is a distribution of a company's profits to the shareholders of that company.
Dividends come from the profits earned by the company during its fiscal year (also called company earnings). Once earnings have been established, the board of directors of your company decides on what dividend, if any, to pay to the shareholders. If the company is doing badly, or if the company needs to reinvest profits, the board of directors may decide not to declare a dividend.
Dividends are usually paid on an annual basis (though sometimes semi-annually or quarterly). There are four important dates you should know about in relation to dividends:
- Declaration date
This is the date on which the board of directors announces the dividend to shareholders and when the dividend will be paid.
- Record date
On the record date, the company inspects its list of shareholders to see who will be paid a dividend. If your name is not on the list, you do not receive a dividend.
- Ex-dividend date
The ex-dividend date is typically three business days prior to the record date. If you purchase the stock after this date, you will not be entitled to a dividend, as the stock purchase takes three days to settle.
- Payment date
On this date, shareholders are paid the dividend. It typically comes two weeks after the record date.
Dividend cover measures the ability of a company to meet payments of dividends out of earnings. It is the ratio of profits earned to dividends paid to shareholders.
An example of Dividend cover
If company earnings are € 10 million and total dividends paid out to shareholders are € 5 million, then the dividend cover is:
€ 10 million ÷ € 5 million = 2
The company can cover dividends twice by its earnings.
Dividend yield is the dividend per share expressed as a percentage of the stock price.
An example of Dividend yield
If the dividend per share is € 0.20 and the stock price is € 8.00, the dividend yield equals:
(€ 0.20 ÷ € 8.00) x 100% = 2.5%
The dividend yield is 2.5%
A high-growth company will most likely have little or no dividend yield because it will probably choose to reinvest most or all of its profits. On the other hand, a mature company with limited growth prospects might have a very large dividend yield if it chooses to distribute a large proportion of its profits. Its stock price might also be relatively low in tandem with its growth prospects, further inflating the dividend yield.