Dividend income is a great way to earn additional returns in the stock market. Some investors in the stock market only buy stocks that pay regular dividends.
This is a common strategy for investors at or near retirement when the consistent income from dividends can be counted on to help with living expenses and so on.
Where do you find companies that pay dividends? A first step might be to a stock screener to look for strong companies that pay consistent dividends. Some of the companies that often page dividends include:
- Preferred stock
- Certain Real Estate Investment Trusts
- Older, more established companies
Look for companies that have paid regular dividends for many years. These companies will often pay dividends even when the stock market is in turmoil and prices are jumping all over the place.
Corporations pay out part of their profits to owners in the form of dividends. This article looks at that process and how you can reinvest dividends to buy more shares if you want.
Dividends are profits that the company pays out to shareholders. The board of directors declares the dividend payment (which is usually quarterly, but doesn't have to be), and owners of stock on a certain date receive the dividend.
Most quarterly dividends are paid on the first day of January, April, July, and October, but some companies may pay on a different schedule, or semi-annually or annually.
Paying dividends follows a sequence of four important dates, and when you buy the stock in the sequence determines whether you will receive the dividend. The important dates are:
- The declaration date is when the board sets the dividend and announces when the stockholders will get their checks. The board also announces the ex-dividend date, which is a very important date to know.
- The record date is when the company sets the list of shareholders to receive the dividend. You must own the stock before this date to get the dividend, but the ex-dividend date is more important.
- The ex-dividend date usually falls two to four days before the record date to allow for the completion of all pending transactions; it can take three days to settle a regular stock sale. The ex-dividend date is the most important date as far as owning the stock if you want to receive the dividend.
- The payment date is when the company mails the checks, often two weeks or so after the record date.
On the ex-dividend date, the market discounts a stock's price, since the dividend is no longer available to buyers.
A dividend reinvestment program, or DRIP, is a service that lets you build your position in the company by reinvesting your dividends in more company stock. If you don't need the immediate income, this is a great way to buy more stock shares.
Companies that offer DRIPs usually inform shareholders or have a place under "investor relations" on the Web site with information on getting started. Your dividends are reinvested in new stock through the program, even if the amount is not large enough to buy a single share.
For example, if your quarterly dividend payment is $25 and the current per share price of the stock is $50, you purchase 0.5 shares. You can't buy fractional shares through a stockbroker.
Most DRIP programs allow you to have additional money regularly withdrawn from your checking account and deposited into your DRIP. Most DRIPs charge very low or no fees, which increases your odds of earning a better return.
Check with the company for details on how its DRIP works. If you don't need the dividend income, this is a low-cost way to increase your holdings. Remember, however, that even though you don't receive the dividend, you are still liable for the taxes due on it.