A dividend word may seem a little bit exotic to an average Joe; however, it is one of the most basic terms in investing and accounting. If you would like to know more about this procedure and why would anyone pay the dividends – don’t miss this one.
Investing and making a profit has always been a part of human’s life. Since the beginnings of our civilization, smarter and brighter, individuals have been trying to make money on those less enterprising. First legal framework of investing as we know today, was written down in the Hammurabi Codecs approximately 1700 BC. The establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land, if the deal was not fulfilled it could end up with a punishment – “an eye for an eye” (Lex talionis)
In the modern economics, an investment is defined as:
“An investment is an asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.”
So are the stocks, considered as one of the greatest tools ever invented for building wealth. It is simple, you purchase shares of a company, make a profit of its appreciation and wait till the firm pays a dividend – Profit-Profit situation. Equities represent a claim on the company’s assets and earnings. As you acquire more stocks, your ownership stake in the company becomes bigger. However, keep in mind that All That Glitters Is Not Gold. Being successful in a stock market requires a further understanding of its principals and common rules. Under no circumstances, do not put all your eggs in one basket, always diversify your portfolio. Remember of the market variation and prices volatility.
Going back to dividends, what are they? In simple words, distributions that are declared by a company’s BoD (Board of Directors) and paid to the firm’s equity holders. It is often done if the earnings are fairly high and the company is willing to award their investor and encourage new ones. The rate of which the dividend is paid is based on a per share amount.
The important dates in the cycle of dividends are:
Declaration Date: This is the date the board of directors convenes and announces if the company will pay a dividend.
Ex-Dividend Date: Used to determine entitlement. In the United States, the Stock Exchange customarily sets this date two business days before the record date. Also, the ex-dividend date is the day that the price per share of the stock drops approximately by the amount of the dividend because the purchaser on ex-date will buy the security “without” the dividend. Often named as an Ex-Date.
Record Date: The Company asks the TA (transfer agent) to provide them with a list of stockholders. The firm uses this list to define who will be subjected to the dividend.
Payment Date: The date the actual payment is made. Normally in the United States, it is a set number of weeks following the record date to permit shareholders records to reflect ownership changes. Also known as a Settlement Date.
Here you can find a dividend “life-cycle”, both final and interim:
From a company’s point of view, the regular dividends may indicate that the firm is in a good financial situation and is seeking new investors. In many countries, the income from dividends is treated at a better tax rate than standard income (tax reclaims and refunds). Investors looking for tax-advantaged cash flows may have a look at dividend-paying stocks in order to take advantage of a potential taxation in a favor.
The dividends might be paid in two ways as Cash, a classical one distributed in currency, or Capital in additional shares of a company.
It is common that firms paying the dividends give investors an option to choose either they would go with Income or Capital treatment. Also, there can be done a DRIP to reinvest the cash amount or shares.
Even though at first the dividend process may seem a little bit complicated, but in fact, it is quite simple and happens every day in the markets. Many of the most known companies pay dividends on a regular basis, often monthly, quarterly, half-yearly or yearly.. Once you would be in a position to buy stocks on an exchange, you better check the ex-dates, you don’t want to purchase then just after the distribution, don’t you?