Dividends are distributions of a portion of a company’s earnings. They are a significant reason why investors purchase shares of stock. Here is an example of a stock quote from Yahoo Finance for Coca-Cola (symbol = KO), with certain dividend information highlighted:
Dividends are distributions of a portion of a company’s earnings
When a company has extra cash from the profit of running its business, there are a variety of things it can do with the money, including: invest it back into its business (such as hiring more employees or building a factory), buy back its own stock, or distribute some of the profit to its shareholders via dividends.
For example, if a company earns $9/share, the company’s board of directors may decide to distribute a majority of these earnings ($6/share) to shareholders via dividends.
Dividend rate vs. dividend yield
When a company declares a dividend, they are declaring a certain dollar amount per share. This can be called the dividend rate. The rate can also be annualized. Dividends are typically paid quarterly and are consistent, although companies can declare one-off “special” dividends as well. Dividend rates can be trailing (total dividends in the last 12 months) or forward (estimates for the next year).
The dividend yield is the percentage of the dividend rate compared to the stock’s current share price (dividend per share / price per share).
For example, a company declares a dividend of $1.25/share for the quarter. This brings the annual trailing dividend rate to $5/share. Given the current share price of $120, the trailing dividend yield is 4.17% (5 / 120).
What is the ex-dividend date?
To receive the dividend, an investor must purchase the shares before the "ex-dividend date." If an investor purchases shares on or after the ex-dividend date, they will not receive the dividend.
Dividends can receive special tax treatment
As described in a previous post, dividends can receive special tax treatment in certain circumstances.
If you have any comments, questions, or ideas for future posts, please let me know
I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.
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