Introduction to Dividends

When companies earn profits, they can either reinvest it back into the company and expand, pay a portion of the profit to shareholders in payment called "dividends", or focus on business debt reduction and/or share repurchases.  When a stock pays dividends, you'll receive a portion of the business's earnings for each share of stock you own.   Usually, the amount of the dividend is a few cents per share, which doesn't seem like much- but if you reinvest your dividends for years and continue to purchase more shares, eventually you'll be receiving dividends that add up to a decent amount.

Dividend Process Within Companies

Whenever dividends are paid, they must go through an approval process by the Board of Directors.  You'll want to take note of three dates regarding the dividends of the stock you own.

• Declaration Date- this is the day the Board of Director's of a company make an announcement that a dividend will be paid to shareholders.  The date of record and payment date will be announced, and a liability will be recorded in the bookkeeping records of the company that money is owed to stockholders.
• Date of Record- is a day that is sometimes called "ex-dividend" date.  This date is the date by which you need to own shares of the company stock in order to receive a dividend.  So if you purchase shares of the stock beyond this date, (usually set about four business days prior to the payment date), you will not be entitled to the dividend payment.
• Dividend Payment Date- this is the day that stockholders receive their dividends.

Most companies decide to pay dividends on a quarterly basis.  So when the amount of dividend is announced for these companies, you will receive a quarter of the amount, four times a year.  Other companies may opt to make dividend payments on an annual basis, instead of quarterly.

Dividend Types

Three types of dividends exist.

• Cash Dividends- these are the most common dividend type.  They are paid out of the profits of a company to the owners of  business (called shareholders).  Companies that issue preferred stock will pay dividends to shareholders before any money is paid to common stockholders.
• Property Dividends- these are less common than cash dividends, and are literally pieces of property with tangible value that is used as dividends.  For example, coffee beans, gold, condiments, cars, erasers- etc.  Property dividends have their market value recorded on the declaration date.
• One-time Dividends- these are special and are in addition to the regular dividends that are paid from a company.  They are extremely rare and are often paid out in times of business crisis- such as a litigation or when the business sells.  One-time dividends may be cash, property or more stock.  Sometimes one-time dividends can be considered a return of capital, which makes them tax-free.

High Dividend Stocks

If your goal is to create an investment portfolio of stocks that pay out high dividends, than you will want to spend time analyzing a company's history of dividend payment.  If this is your investment goal, you will want to limit your consideration to businesses that have a record of dividends that have increased in value over the last twenty years or more.  You should also consider the industry a business is in, and decide whether or not the company may continue to generate the positive cash flow that is required in order to pay out the high dividends.  Some businesses may have twenty years or more of high dividend payments for stockholders, but be considered a bad investment as it may have a high risk of facing some sort of a litigation that could cause a bankruptcy.