Lesson 2: Introduction to Dividends

What Are Dividends?

Dividends are periodic payments that companies make to shareholders from their profits. Think of them as your share of the company’s earnings for being a part-owner.

Key Characteristics:

• Typically paid quarterly (every three months)
• Usually paid in cash, but can sometimes be additional shares
• Not all companies pay dividends

Why Companies Pay Dividends

1. Reward Shareholders
Dividends provide regular income to investors, making the stock more attractive.

2. Signal Financial Health
Companies that consistently pay dividends are often stable and profitable.

3. Attract Income-Focused Investors
Some investors specifically look for dividend-paying stocks for regular income.

Companies That Typically Pay Dividends:

• Mature, established companies with steady profits
• Utilities, consumer staples, and healthcare companies
• Blue-chip stocks – large, well-known companies with history of stable earnings

Companies That Typically DON’T Pay Dividends:

• Growth companies (like many tech startups)
• Companies reinvesting all profits back into the business
• Companies in financial difficulty

Essential Dividend Terminology

Dividend Yield
This tells you what percentage return you’re getting from dividends alone.

Formula: Dividend Yield = (Annual Dividend per Share ÷ Current Stock Price) × 100

Example:

• Stock price: $100 per share
• Annual dividend: $4 per share
• Dividend yield: ($4 ÷ $100) × 100 = 4%

Payout Ratio
The percentage of a company’s earnings paid out as dividends.

Formula: Payout Ratio = (Dividends per Share ÷ Earnings per Share) × 100

A very high payout ratio (over 80%) might be unsustainable, while a very low one suggests the company could pay more.

The Dividend Calendar

Understanding these key dates is crucial for dividend investors:

1. Declaration Date: Company announces it will pay a dividend
2. Ex-Dividend Date: The first day the stock trades without the dividend. You must own the stock BEFORE this date to receive the dividend
3. Record Date: Company reviews its records to see who owns shares
4. Payment Date: When dividends are actually paid to shareholders

Timeline Example:

• Declaration Date: January 15
• Ex-Dividend Date: February 1
• Record Date: February 2
• Payment Date: February 28

Dividend Reinvestment Plans (DRIPs)

Many companies offer DRIPs that automatically use your dividend payments to buy more shares of the stock.

Benefits of DRIPs:

• Compound Growth: Your investment grows faster as you buy more shares
• No Commission: Usually no trading fees for DRIP purchases
• Dollar-Cost Averaging: You buy at different price points over time
• Fractional Shares: You can buy partial shares with small dividend payments

Practical Exercise

Calculate the dividend yield for these companies:

1. Company A: Stock price $80, annual dividend $2.40
2. Company B: Stock price $150, annual dividend $6.00
3. Which company offers a better dividend yield?