Stock Dividends Explained

What is a stock dividend?

A stock dividend is the payment a trader obtains from the company he/she is presently investing in.

The company pays the dividend from the earning it acquired within its financial year. Hence, if the company does not make a profit, dividends are not likely to be given to the investor.

The dividend is generally paid in two parts, an interim and a final dividend. This means an investor who has shares in a company for one year; he or she will ordinarily obtain two lump sum payments annually (most often as cash payments).

To collect a dividend, you must have the stock before the ex-dividend date. The dividend is given to the investor on the payment schedule set by each individual company. The dates can be obtained from a company's official website in the investor relations section.

Dividend Example

If you own 200 shares in a company valued at $10 each ($2,000 total) before the ex-dividend date and the company issues a dividend of $0.10, you will be paid $20! (($2000/$10)x$0.10).

By holding a stock before the ex-dividend date, you will be paid a dividend regardless of whether you have held it for 10 years, 10 months or 10 days!!

Note: Dividends are such a good source of a windfall or bonus that some traders only buy stock before the ex-dividend date and profit dividends rather than capital gains.

Find another great reason to trade stocks by checking out stop losses.

Dividend Yield

The dividend yield (in terms of common shares) is: the latest full-year dividend / current share-price. The figure is expressed as a percentage and informs traders the dividend they are likely to receive from trading a stock.

Here is how it can be illustrated simply:

  • The share price of a company is $10
  • The company gives a dividend of $0.30
  • Hence, the dividend yield is 3%
  • So, an investor who has 1000 shares (worth $10,000) will receive a $300 payout!