Dividends distributed by companies to their shareholders represent a very interesting investment to generate passive income. Allocating a monthly amount to buy shares and reinvest the dividends is a good strategy to help us pay our household bills. At the Club we help our members choose the safest companies to invest in for dividends.
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What are dividends?
On the stock exchange or stock market, the value of shares in a wide variety of companies is adjusted by supply and demand. When we invest in a company, we are actually buying shares, i.e. we become owners of a very small part of the company.
As a result of owning shares, we are also entitled to receive a share of the profits. This is known as a dividend distribution.
As we will see below, not all companies pay dividends and are not obliged to do so.
How is the dividend distributed to shareholders?
Dividend distribution is a very simple process for the shareholder. You basically don’t have to do anything 🙂
Simply by holding the shares, your bank or broker will pay the money corresponding to the dividend into your account.
In most cases it will be the net amount, i.e. with tax withheld.
Calculate the amount of the dividend to be paid.
How much money we should be paid in dividends can be calculated very easily if you have access to the right data.
Companies that pay dividends set the amount of the annual dividend and the frequency of payment throughout the year. It should be noted, however, that this can change at any time and it is therefore very important to choose good companies if we want to invest for their dividends.
For example, let’s imagine that Coca Cola (KO) has announced a dividend of $1.64 per share and that its payment frequency is quarterly. This means they will make four payments of $0.41 over the course of the year. All gross income.
In case we had more than one Coca Cola (KO) share, as all data are per share, we would have to multiply the amounts by the number of shares we have.
Continuing with the example above, if we had 10 shares of Coca Cola (KO), our annual dividend to be received would be $16.4 in four payments of $4.1.
Why do companies pay dividends?
The payment of dividends is a completely voluntary decision of the company’s board of directors. The voluntary nature of shareholder remuneration creates an image of trust and stability in companies that have been distributing profits to their shareholders for many years in a row and increasing them over time.
A company that has been paying out dividends for more than 40 years, and increasing them year after year, is a clear sign of a solid financial performance .
Generally, the strongest companies have a very clear policy of paying out dividends to shareholders and have been doing so for many years and will continue to do so in the future.
This is an incentive to invest in the company and sends a very clear message about its future, which leads to more investors placing their trust in the company, increasing its stability and, due to demand, its share price.
t is a snowball effect but it does not mean that only the best companies pay dividends. Many successful companies like Tesla (TSLA) or Netflix (NFLX) do not have a dividend policy and probably never will. This is neither good nor bad from a business or shareholder point of view. It is simply that such companies do not fit into our dividend investment strategy.
All companies, even if not necessarily, have a dividend policy. This policy dictates the amount of dividend to be paid by the company to shareholders and also the frequency with which dividends will be distributed during the year.
When a company makes a profit, they have to decide what to do with that money. If you think about it, there are really only three things they can do with the profits:
– Reinvest profits in the business, whether in the form of liquidity, equipment, infrastructure or human resources.
– Pay off debt.
– Pay dividends to shareholders or buy back their own shares.
Dividend policy is an important factor to consider when deciding which companies to invest in.
How do you know when companies pay dividends?
As mentioned above, each company has a different dividend policy detailing the amount of the dividend as well as the frequency of payment throughout the year.
Whenever a dividend is to be paid, there are two important dates to be aware of: The ex-dividend date and the payment date on which the dividend is paid.
All this data can be consulted in the interactive reports and tables that we have at StopDayTradingClub and that we update daily, or you can search the information on the internet company by company 😉
What is the Ex-Dividend Date and why is it important?
The term “ex-dividend date” can be translated as “non-dividend date“, i.e. the date by which the holders of shares will be considered as beneficiaries of the next dividend distribution.
In other words, the date before which we must buy or hold shares in order to be paid the corresponding dividend.
Let’s take an example! Imagine I have done some research on StopDayTradingClub reports and I have decided to buy Microsoft (MSFT) shares to receive dividends. The next step will be to look at the “ex-dividend” date which let’s say is 22/03/2021 and the “payout date” which for example will be 12/04/2021.
If you buy shares before this date, you will receive the dividend on the “payment date“. If you have missed the date and buy later, you will have to wait until the next dividend distribution, which is why the ex-dividend date is so important.
Remember that each company distributes dividends differently throughout the year. Some are annual, others semi-annual, quarterly or even monthly. In each case, each distribution corresponds to an ex-dividend date and a payment date.
When is the dividend paid out?
The day the dividend is credited to your account corresponds to the “payment date” which can be found for each company in the StopDayTradingClub reports or by searching online for each company.
How does the dividend payment affect the share price?
This is an important issue to consider. On the ex-dividend date the company sets aside part of its capital for dividend payments. This is why there is a separate ex-dividend date and a separate payment date in the calendar.
This is because on the ex-dividend date the company subtracts a part of its market capitalisation that no longer belongs to it but to the shareholders. On this date this subtraction from the company’s capitalisation takes place, i.e. the money is set aside for later distribution on the payout date.
Because of this and logically, on an ex-dividend date the company’s shares will have a lower price when the stock market opens. Normally the price at which they open is the result of subtracting the dividend payable from the share price of the previous day. Let’s look at an example.
Let’s imagine that Coca Cola (KO) is going to pay a dividend of $0.41 quarterly and is trading at $50 a share. Then when the ex-dividend date arrives, the Coca Cola (KO) share is expected to trade at 50-0.41= $49.59 when the stock market opens.
This is normal and should not be a cause for concern, as normally the share recovers its value if we have chosen a good company to invest in.
What if they are not paid?
For legal purposes, absolutely nothing happens. As mentioned above, companies are not obliged to distribute their profits to shareholders and can change their dividend policy at any time without any right of reply from shareholders.
This may be due to unexpected events that affect the company’s operations and the company decides to suspend the dividend as it allocates the money to other items in order to overcome a bad patch.
As you can see, it is extremely important to have access to quality information and data in order to choose the best companies. Those that, despite economic crises and other adversities, have managed to pay and increase dividends uninterruptedly for many years due to their good work and foresight.
What is a scrip dividend?
When a company decides to pay its shareholders in shares instead of dividends, it has chosen to pay a scrip dividend.
Scrip dividends usually correspond to newly created shares by the company instead of existing shares.
For dividend investors like us it is not a good sign to find that a company is distributing shares instead of dividends. In most cases it is because they do not have sufficient liquidity to pay out the dividend distribution.
How are dividends taxed?
This section refers to Spanish legislation but can serve as an educational example to do your own research on your country’s legislation.
According to Law 35/2006 of 28 November 2006 on personal income tax, dividends are considered to be income from movable capital.
Therefore, individuals who receive dividend income must include it in the savings tax base in their tax return and pay tax at the corresponding rate.
Normally the tax rates vary between 19 and 23 percent withholding tax depending on the amount to be received, which in 2020 is set at a minimum of 6000 euros and a maximum of 50,000 euros.
If our shares come from companies in other countries, as in my case in the United States, we must bear in mind that each country has its own tax regulations. Therefore, if we invest in a foreign country, we must ensure that there is a double taxation agreement between countries, so that we avoid paying taxes in the country of origin of the company and in the country in which we reside.
In the case of investing in the United States from Spain, there is a double taxation agreement, so we will only pay taxes in the United States and normally our broker will take care of everything if we fill in the W-8BEN form, which is quite simple.
In addition, the United States rewards foreign investment and applies half the withholding tax that it applies to Americans. At the moment I only have 15% withholding.