Do you want to earn a steady income from dividends? This is something you must be aware of!
When holding a dividend-paying stock, it's important to keep in mind, the following things!
‘Dividend investing’ is the practice of purchasing stocks that pay dividends in order to generate a consistent income stream from your investments. This income is in addition to any gains in the value of your portfolio's stocks.
A ‘dividend’ is the term used to describe how a company distributes its profits to its shareholders. A company can distribute a portion of its profit as a dividend to shareholders when it has a surplus. Usually, it is paid out of the profit that remains after necessary costs have been met and can take the form of cash, cash equivalents, shares, etc. The board of directors of a company determines the dividend rate, taking into consideration the consent of the majority of shareholders. Any remaining funds are taken and reinvested in the company, which is referred to as retained earnings.
The ‘dividend yield’, which is the dividend per share, is expressed as a percentage of the share price of a company; for example, 5 per cent.
Dividend yield = (Dividend per share/current share price)*100
The dividend payout ratio (DPR) is the ratio of dividends paid to shareholders to the total net income generated by the company. In other words, the dividend payout ratio calculates the percentage of net income distributed to shareholders as dividends.
Dividend payout ratio = Total dividends/net income or, dividend per share/earning per share
When holding a dividend-paying stock, it's important to keep in mind, the following dates:
- Declaration date - The date on which the board of directors declares its intention to pay a dividend.
- Ex-dividend date - It is the first day that a stock trades without a dividend. Common shareholders of dividend-paying companies are eligible for distribution if they own the stock prior to the ex-dividend date.
- Record date - The investor must be on the company's books on the record date, in order to be eligible to receive a dividend. The record date and the ex-dividend date are frequently mixed up. Remember that the stock exchange determines the ex-dividend date while the company determines the record date.
- Payment date - The payment date is when the dividend is distributed to the shareholders.