5 Key Things You Must Know If You Are Starting Dividend Investing
Investing in dividend paying stocks is a cool way to put your money into work. Why? Because it has many advantages than its alternatives like bond investing. If you are interested in all of the pros and cons of dividend investing, you can check our article on the matter here, in this post we are going to explain some key and very basic things one should know, if he/she wants to invest in dividend paying stocks. If you are completely new in this filed, you’d better check out our reading about the very basics of dividends. The current article is about the basic terms that characterize a dividend paying stock – what exactly they mean and how to read them.
Important Dividend Dates
When a company pays dividends, 4 main dates are involved in this process: declaration date, date of record, ex-dividend date, payment date. To read more about them, follow the link from above and read the detailed article about them. Here is what each of this dates mean:
Declaration date – this is when the board of directors declare that the company is going to pay a dividend to its shareholders. It announces who much will be paid, the date of record and when the payment will be made.
Date of record – this is the date before which you must be in the company’s shareholders book, in order to receive the dividend. This date is determined by the company and it is used to determine the most important date for a dividend paying stock – the ex-dividend date. Please note, that this is not the date up to which you must buy shares to get dividend. For example if the date of record is 01.01.2015, this doesn’t mean that if you purchase shares a day before this date you will catch a dividend payment. This is because each stock purchase needs a few days to be settled, depending on the exchange it is traded. This is why you need the ex-dividend date
Ex-dividend date – the most important date – you get the dividend if you buy or own the shares before this date and you miss the dividend if you own or buy shares on or after this date. As simple as that. This is the first date the shares are traded without the current dividend payment. This means also that if you sell your shares on this date, you still catch the dividend.
Payment date – this is when the dividend payment is made to the shareholder, this is when you get your money.
This is the percentage that determines the rate of return of your dividend investment (i.e. 7.45%). It’s calculated by the following formula:
Dividend Per Share / Share Price * 100 = Dividend Yield
For example, if the price of one share is $100 and the company pays a dividend of $6 per share, then the dividend yield of this stock is:
$6 / $100 * 100 = 0.06 * 100 = 6% dividend yield
Please note that is the share price falls, the dividend yields goes up and vice versa. In our example, if the price of a share drops to $80 and the dividend remains the same ($6 per share), then the dividend yield becomes:
$6 / $80 * 100 = 0.075 * 100 = 7.5% dividend yield
When the price changes (this happens daily) – the dividend yield changes. Have this in mind when you read outdated dividend yield numbers, because they are probably not true for the current price.
Dividend Payout Ratio
Dividend payout ratio is simply how much of its profits a company is paying as dividends. Fir example, a company with a $10 million net profit for the last year that pays $1 million in dividends has a payout ratio of 10% . You can calculate this by the following formula:
Payout ratio formulas
Dividends / Net Profit * 100 = Payout Ratio
Dividend Per Share / Earnings Per Share (EPS) * 100 = Payout Ratio
When Are Dividends Paid?
The dividends are paid on the announced payment date. You can see more about the important dividend dates here. If you purchased your shares via a stock broker and you have a brokerage account, you receive your dividend payment directly there. In other cases, the company chooses a bank responsible for dividend payments and you can claim your dividend in the bank’s office.
Do I Pay Taxes For Dividends?
In the most common case, the answer is YES, of course. But taxes can vary depending on your country’s laws and the company’s country laws. In some cases you owe 0% dividend tax and in other the tax can reach up to more than 45% of the dividend amount.
In the common case, the dividend tax in the USA is 15% for qualified dividends, as well as capital gains, for individuals in the 25%, 28%, 33% and 35% income-tax brackets. People with more than $400,000 in taxable income and couples with more than $450,000 will see the rate rise to 20%. A qualified dividend is any dividend that is taxed at the capital gains tax rate. In the common case, most regular dividends from U.S. firms (corporations) are qualified. You can check this for more info: https://en.wikipedia.org/wiki/Dividend_tax
In the UK, you pay 0% tax if you are not a higher or additional taxpayer. The tax may rise as much as 36.11% . Here are some more details:
|Tax band (UK)||Effective dividend tax rate|
|Basic rate (and non-taxpayers)||0%|
|Additional rate – dividends paid before April 2013||36.11%|
If you are not sure what taxes you must pay, you’d better hire a professional for help.Please note, that the responsibility for declaring and paying your taxes is completely yours.
Also, have in mind that these things change when the law changes and this happens from time to time.