When learning about stock dividends it is important to the first know the definition of a dividend itself. Dividends exist in the form of stock, property or cash and they are offered mostly by stable and healthy companies. Those companies that offer dividends don't typically have share prices that move up or down in price very much but the dividend makes up for that lack in movement. When looking to invest in dividends it is important to note that many high-growth companies will rarely offer dividends. This is because they reinvest their profits back into the company in order to continue growth. This is referred to as dividend reinvestment and is another term that you should familiarize yourself with in addition to the term dividend yield.
Ex-dividend – a stock is called an ex-dividend is an investor is confirmed by the company to receive the dividend payment. Basically, it is when the dividend belongs to the seller instead of the buyer. When trading shares, you will come across this definition.
Cum dividend – this is what happens when the buyer of a security entitled to a dividend that has already been declared but it has not been paid.
Dividend payout ratio – more mature and healthy companies have a high dividend payout ratio and it is calculated by taking the yearly dividend per share and dividing it by the earnings per share. Another way to calculate it is to take the dividends and divide them by the net income. In other words the dividend payout ratio is the percentage of the earnings that are paid to shareholders. This ratio gives the investor insight into how well the earnings actually support the dividend payments.
Note:
- While income investors might be tempted to look for the highest yield, they should keep in mind that a falling stock price raises the yield.
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