When Do Dividends Get Paid?

Dividends are typically paid each month or quarter. International stocks typically pay dividends annually.

Dividends must be declared by the board of directors of a company each time they get paid.

There are four important dates to remember:

Declaration Date:

This is the date the board of directors announces their intention to pay a dividend. On that day, the company creates a liability on the books and now owes the money to the stockholders. The board will also announce a date of record and payment date.

Date of Record:

This is the date on which the company reviews its records to determine exactly who its shareholders are. An investor must be a holder of record in order to receive a dividend payment. Only owner of the shares before the ex-dividend date will receive payment.

Ex-Dividend Date:

The ex-dividend date of a stock is the single most important factor to consider. In order to receive a stock’s upcoming dividend, an investor must purchase shares of the stock prior to the ex-dividend date.

Payment Date:

This is the date the dividend will actually be given to the shareholders of record.

Do your homework as you don’t miss important dividend payments especially if the stock pays dividends periodically.

For example: If you visit: www.dividend.com, and check out Microsoft (MSFT), review the dividend information listed to get the actual ex-dividend and payment dates.  Most financial websites will provide this date along with other information.

 

 

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The Tale of Two Investors

 

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The Initial Facts

Joe and Joanne are both 55 year old investors. They hope to retire in 10 years and they each have $100,000 invested in the stock market.

Joanne invested in a portfolio focused on the highest dividend payers in the U.S. and Jim put his money in a portfolio that tracks the S&P 500 Index, which consists of both dividend paying and non- dividend paying stocks.

We used historically data to show how this would have worked over a live market, but remember, past performance is no guarantee of future results.

 

The Accumulation Phase

For the first 10 years, both investors did not take any income, but instead re-invested their dividends. Let’s call this the accumulation period.

Joanne‘s portfolio value after 10 years was $386,848 and Joe’s portfolio value after 10 years was $385,118.

 

The Distribution Phase

For the next 20 years, each withdrew 5% income from their respective portfolios.

Joanne was able to take $718,757 after 20 years and Joe was able to take $569,079 after 20 years.

Joanne’s additional income is over $149,000 more than Joe’s income.

 

Ending Value

Joanne had an ending value of $906,634 and Joe had an ending value of $691,313. This represents a difference of over $215,000 which represents additional residual portfolio value. Joanne essentially got a total of $364,000 more in additional income and growth from the same initial investment.

 

What drove the income and why the big difference?

Joe’s withdrawals were made up of about 65% principal and 35% dividend payments, while Joanne’s withdrawals were made up of nearly 21% principal and 79% dividends! This was the key to her end balance and sustainability of her portfolio.

 

Footnote:

Joanne’s portfolio is comprised of the top 30% of the highest dividend yielding stocks in U.S. listed markets. Joe’s portfolio tracks the S&P 500 Index. Sources: Bloomberg, Kenneth French Data Library. Period from 12/31/1985 to 12/31/2015, with accumulation phase from 12/31/1985 to 12/31/1995. Withdrawal phase from 12/31/1995 to 12/31/2015. Hypothetical example for illustrative purposes only. Does not represent an actual investment.

 

Discovering the Power of Dividends

Generating income is a universal challenge that impacts most investors. With bond yields at a low point, dividend paying equities can become a income engine for your portfolio.

Since 1926, reinvestment of dividends has been responsible for more than 96% of the stock market’s return, helping a $10,000 investment grow to about $47.6 million-more than $46 million over the stock returns alone.

 

Footnote:

The S&P 500 Index and data compiled by Jeremy Siegel, Professor of Finance at the Wharton School of the University of Pennsylvania. The S&P 500 Index is an unmanaged index of 500 U.S. large-cap common stocks traded on the New York Stock Exchange and NASDAQ Stock Market, weighted by market capitalization. It was launched on March 4, 1957. Professor Siegel has reconstructed S&P 500 Index returns for earlier years using methods explained in his book, “The Future for Investors.” Unlike a mutual fund, the performance of an index is not reduced by operating expenses, transaction costs and taxes. It is not possible to directly invest in an index. Index performance is for illustrative purposes only and is not intended to represent the past or future returns for any actual investment. Past performance does not guarantee future results.

 

 

 

What is a Dividend?

Companies make profits and have a few choices as to what to do with the money:

  • Maintain the money in retained earnings
  • Look to acquire other companies or expand operations
  • Buy back stock
  • Pay dividends to the shareholders

 

A dividend is a payment made by a corporation to its shareholders, with each share receiving an equal amount of value. Dividends can be paid as additional shares of stock but most are paid as regular cash dividends, paid at predictable intervals- usually once every three months in the United States. Some companies do pay dividends annually, semi-annually or every month.

Each company sets its own payout schedule and determines the dividend dates on which the dividends will be made. Some companies even pay a special dividend (one time) every so often and are not part of the regular dividend schedule.

Companies can change their dividend policies at any time, but we look for companies that increase their dividend payments over time.

So if a company is paying a 3% annual dividend over the course of one year, the company is essentially saying if you buy my stock, I will more than likely pay you a present of dividend payments as gratitude.

So why buy a stock that does not pay a dividend when you can buy a company that has a history of rewarding their investors with regular cash payments.   This also reduces the overall risk characteristics of a portfolio when adding mature stable companies that pay such dividends.

The most exciting part is when you reinvest your paid dividends to purchase more shares; you will start to see your portfolio grow at a much quicker pace.

Companies have been paying dividends for over 400 years. The first company to pay a dividend was the Dutch East India Company in the early 1600s. Dividends have accounted for over 40% of the S&P 500’s total returns since 1929.

The Power of Dividends

More than 400 of the companies in the Standard & Poor’s 500 Index make regular cash distributions to shareholders. Source: Standard & Poor’s

Dividends may not be contractual obligations that a bond’s interest payments are, but once a dividend has been established, companies have historically been reluctant to decrease or remove dividend payment without good cause.

Dividends given investors the ability to use corporate earnings in a variety of ways:

  • Reinvest the dividend to buy more shares to build wealth
  • Take dividend in cash withdrawals for income
  • Meet other financial obligations or variety of financial objectives

Let’s say you find a $25 stock that pays an annual dividend of $1 per share. That equates to a 4% yield, which is certainly respectable. This does not account for any increase in the share price over time or account for increased dividend payouts over time as well.

To illustrate the power of dividends, let’s take a look at Chevron (CVX). If we purchased CVX back in 1996 for 100 shares, the share price was $32.50 per share. The annual dividend at that time was $1.08 per share with a corresponding yield of 3.3%. Not all that exciting given it would have taken just over 30 years for dividends to return the investor’s original purchase price.

But the dividend did not stay flat! By the end of 2014, the annual dividend had quadrupled to $4.21 per share. Had the investor reinvested the dividend payments, the total value would be far greater and that is the best methodology of building wealth with stock dividend investing.

But Chevron enjoyed rising profits and dividend payments. By the end of 2014, Chevron’s stock price was $113.20 or more than three times the original purchase price In addition, Chevron enjoyed dividend growth for 29 years since 1986. No one would consider Chevron to be a growth stock, but I have demonstrated that dividend payments can make a major impact!

No one would consider Chevron to be a growth stock, but stocks that pay dividends over time can clearly build wealth.

Source: Morningstar

Let’s review a more recent example. If we purchased shares of Proctor and Gamble (PG), the price per share on May 1, 2010 was $61.09 with a corresponding yield of 3.16%.

The share price as of May 1, 2015 (five years later) was $81.69 with a yield of 3.13%. Although the yield has been similar, the stock enjoyed a large increase in share price. If we reinvested the dividends, we would have realized an even larger gain. In fact, PG has experienced 58 years of dividend growth since 1957.

Source: Dividend.com

Ronald Read, a Vermont gas station attendant and janitor, invested in recognizable names when he amassed an $8 million fortune, according to his attorney. A large part of that fortune was later bequeathed to an area library and hospital after his death, stunning a community that had no idea about his wealth.

Most of Read’s investments were found in a safe deposit box, Read’s attorney, Laurie Rowell, told CNBC. Those investments included AT&T, Bank of America, CVS, Deere, GE and General Motors.

“He only invested in what he knew and what paid dividends. That was important to him.” she said in an interview with “Closing Bell.”

Please note, however, dividend payments can be increased, decreased or eliminated at any point given prior notification of management

Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results.

 

This post is intended for informational/educational purposes only and should not be construed as specific investment advice or a recommendation to buy or sell any security or investment product. The statements and opinions expressed in this article are those of the author. Talk to your financial advisor before making any investing decisions.