What Is a Dividend: Examples, Dates, Yield, Shares, & Live Off


It is often said that people receive dividends from their shares, or that entrepreneurs choose to take part of the company’s profits in dividends.

But what does a dividend mean? Do all shares pay dividends? How does it really work? In this article, you will learn what you need to know about stock dividends.

So, what is a dividend?

A dividend means that a company distributes part of its outstanding assets, from the company, to the shareholders. In most cases, it is when companies make a profit that they choose to distribute a certain part of the profit. Both listed and private limited companies can have dividends.

Many private entrepreneurs choose to have a dividend for tax reasons, as it is more profitable than taking everything out in salary.

How does a dividend work?

As a shareholder, you are a partner in a company and are entitled to current and future profits. A dividend is a payment in the form of cash or other assets from the limited company to the shareholders.

The most common form of dividend is that a company distributes all or part of previous profits. A company can also pay extra dividends to shareholders.

This could be due to the company selling a business or other asset that means that the company has received more money than they need to continue running the company.

The relationship between the size of the dividend and the company’s current share price indicates what the so-called yield a share currently provides.

It thus shows what percentage of your investment you get back in the form of dividends each year.

Tip

Repurchases of shares, bonus issues and redemption of shares are also counted as dividends to shareholders. The most common form, however, is cash dividends.

Why do companies pay dividends?

A company strives to have an optimal balance when it comes to capital – neither too much nor too little. Just enough money is needed for the company to be able to pay costs, continue to grow and increase its profits – but no more than that.

It is common to measure a company’s performance in terms of profitability, such as the profit in relation to the company’s equity.

For that reason, the result of too much money is negative, much like filling a deciliter measure with a liter of water.

Example

John runs a sausage kiosk and aims to get a return of 10% on the money he has invested in the sausage kiosk. Last year, he had a profit of $2000, which in relation to the original bet of $20,000 gives a profit of 10% and he is exactly on target.

If John retains the entire profit in the company, the return on his invested capital will decrease.

I expect that his profit will be the same next year and then see that $2000 in profit in year two divided by $22,000, ie initial $20,000 plus the profit of $2000 in year one, is 9.09%.

He no longer fulfills his own goal and in this case it would have been better to distribute the money instead of reinvesting it.

Do all companies pay dividends?

Not all limited companies pay dividends to their shareholders. In order to be able to pay dividends on an ongoing basis, it is usually required that the company makes a profit.

It is not uncommon for companies to make a loss during certain parts of their life cycle and then it can be difficult to pay dividends.

Companies that make a profit can either choose to keep the entire profit to invest in the business and continue to grow or to distribute all or part of the profit to the shareholders.

It is usually a combination, ie that you distribute a certain part of the profit and keep a part to continue to grow.

In general, large and mature companies tend to distribute a larger share of the profits than smaller companies, which to a greater extent retain the profits to finance continued growth.

Example

A research company is dependent on money today to pay researchers, salaries and equipment and thus hopes to be able to find new drugs that provide an income in the future.

Since there is no profit today, the company does not distribute any money. The hope is to be able to do it in the future instead.

An established food chain that has several stores and no direct ambitions to grow further can distribute large parts of the profit because it is not needed in the business for daily operations.

A newly started clothing chain that makes a profit, but also has the ambition to grow quickly and establish itself in new markets, chooses to keep the profit to finance growth.

By doing so, they hope that profits will rise, which will ultimately benefit shareholders.

Is dividend important?

The most important thing for a company is that the money is used in the best way to maximize the value of the shareholders’ money.

The total return from an investment can come from two different sources, partly via rising share prices and partly via dividends.

Historically, dividends have been an important factor for the total return in the long term, while in a shorter perspective it is more important how efficiently the company uses the money.

If a share does not pay dividends, expectations are instead a little higher on a rising share price.

If a company finds good investment opportunities that are expected to give shareholders a good return, it may be a good idea to keep the profit and reinvest it in the business.

This is to increase profits even more over time. If, on the other hand, the company does not find profitable ways to reinvest the money they have earned, it is usually better for the money to be distributed to the shareholders instead.

In general, it can be said that the money that a company earns should be distributed if the shareholders can find better ways to reinvest the profit than the company can.

Do you have to buy shares with dividends?

You do not have to limit yourself to just buying companies that pay dividends. However, it can be good to look a little extra at how the company uses the money if it does not go to dividends.

A company that finds many good investment opportunities that in turn leads to increased profits and rising share prices is good.

If the money is used in a way that you do not think is good, it may be wise to give up that share.

If, on the other hand, you want a current income without having to sell your shares, it can be a good idea to buy shares that pay dividends.

When do you get a dividend?

After a company has added up the profit from the previous year, an annual report is prepared. Based on this, the board shall submit a proposal on how the profit is to be used, for example for dividends.

Thereafter, the Annual General Meeting decides on the proposal.

Most dividends on the Stockholm Stock Exchange come in the spring and April / May is high season.

To be entitled to a dividend, you need to be entered in the share register on the record date, which is usually the second banking day after the Annual General Meeting.

The following days are good to know in connection with a company’s dividend:

Zinc day: This is the last day when you can buy the share and be entitled to a dividend. You need to keep the shares in your account overnight until the next day to be entitled to the dividend.

X-day: This day the share is traded without giving the buyer the right to a dividend. However, you can sell the share on the ex-day but still be entitled to the dividend.

Record date: The day when you need to be registered as a shareholder to be entitled to a dividend. It falls two banking days after the sink day for European, US and Canadian stocks.

It is possible to sell a share on the X-day and still be entitled to a dividend because we in Sweden apply two settlement days for the sale of a share transaction.

This means that money and shares change owners two days after the sale date. If you are the owner in the example below and sell on Tuesday, you will be the owner until Thursday.

Thus, you are the owner on the record date and are entitled to a dividend. If you want to receive the dividend, then make sure to be the registered owner on the record date. Not sure about other places in the world do.

Dividend day: The day when the dividend is booked into the account.

Conclusion

In theory, a share falls as much as the dividend on the day it is traded excluding the right to a dividend, ie the X-day.

It is therefore not possible to buy a share in the hope of being able to sell it immediately after the dividend with a profit corresponding to the size of the dividend, just a tip.

Good luck!

Kevin

Hi, my name is Kevin and I am a weightlifter, now part time blogger. Keep in mind that I dont have any fancy degrees or operate some high-end business company. I am just a dude from Sweden who loves to learn new things, especially new things on how I can inqrease my wealth. And now I have the opportunity to share that knowledge back to you.

Recent Posts