What is a Dividend?

In the stock market forums that I am a member of, most of the time newbie investors, including even the not so newbie, always asking what is a dividend? what are the significance of the dividend dates? and so on.. It seems it would be great to discuss this matter first before going further.

What is a dividend?

Wikipedia defines:

 A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, it can re-invest it in the business (called retained earnings), and pay a fraction of this reinvestment as a dividend to shareholders. Distribution to shareholders can be in cash (usually a deposit into a bank account) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase.

The word “dividend” comes from the Latin word “dividendum” (“thing to be divided”).

In other words, companies divide their profits up among shareholders. In the Philippines, most companies will make dividend payments annually. Some companies will make semi-annually and others quarterly, it all depends at the discretion of the company. Most of the time dividends are paid in CASH, sometimes paid out in the form of ADDITIONAL STOCKS. There are other forms of payment but these two are the most common in the Philippines.

Dividend Dates

Most of the newbie investors are confused on the dividend dates. I will try to explain the meaning of each date hoping not to confuse you more.

Declaration Date: is simply the day when the Board of Directors announces their intentions to pay a dividend.

Ex-Dividend Date: is the day wherein all shares bought are excluded to received the recent dividend declared. This means existing holders of the stock will receive the dividend even if they now sell the stock, whereas anyone who now buys the stock will not receive the dividend. So, if you want to receive the dividend you should take a position prior to this date.

To understand better, I want to illustrate an example: Suppose company XYZ declares a cash dividend today (March 2) of Php1.50 per share with Ex-Dividend Date on March 20. In order to received the dividend, You must own a share of company XYZ from now on up to March 19. On March 20, if you decide to SELL your position, no problem, YOU ARE STILL ELIGIBLE AND WILL BE PAID WITH THE DIVIDEND. And If you decide to hold your position, it’s fine you are still eligible and will be paid with the dividend. However, If you forgot to own a share up to March 19 and remember only on March 20 and you decide to own a share, sorry YOU ARE NO LONGER included to receive the dividend. I hope this is clear.

Record Date: For the small investors like me(us), this date is not important. We don’t even bother about this date. This Date is important to the company wherein they will check their record book who are the registered shareholders on or before this date. Only those shareholders that are registered as of this date will receive the dividend.

Payment Date: is the day when you receive the dividend cheques or credited to your brokerage accounts.

Calculating your Dividends

From our example above, assuming you bought 1000 shares of Company XYZ. To know how much you will get, you simply have to calculate the dividend payment by the number of shares.

My Gross Dividends = Dividend Payment * Number of Shares
Php1500.00 = Php1.50 * 1000

Note that dividend income are taxable. In the Philippines, the tax rate is 20%, hence

My Net Dividends = My Gross Dividends * (1 – 20%)

Php1200 = Php1500 * 0.80

There you go, I hope everything is clear! In case you need more clarification, inquiries, comments or suggestions are most welcome!

Thank you for reading and may you find great success ahead!

4 Comments on "What is a Dividend?"

  1. Thanks for sharing this great article bro INDO. 🙂 I’ve learned a lot from it.. Now I know what those dates are meant and how can I benefit dividends from a company.. I’ll try to browse more in your blog kasi marami pa akong gusto malaman tungkol sa dividends. I’ll send you a PM incase hindi ko mahanap yung sagot. 🙂

    More power and good luck sa trades mo bro INDO. 🙂

    • Hi Cebuano,

      Thanks for stopping by. I’m glad you learned something from my blog. Tanong ka lang, I’m HAPPY to help and together we will learn from each other patungo sa ating pag-unlad.

      By the way, I do recently my dividend stock screener that you may be interested.

      Cheers,

      INDO

  2. You can earn some extra bucks from your page, i see several opportunities
    here. You should search in google for:
    Yoogurn’s money making

    • Hi Sir Napoleon,

      Thank you for stopping by and making a comment. I appreciate your suggestion. Maybe in due time I will monetize this site since it is not my priority. My primary purpose in running this blog is to share, help and learn experiences as we go our journey towards financial freedom.

      Again, Thank you for your suggestion 🙂

Leave a Reply

%d bloggers like this: