5 Facts about Dividends You May Not Know
March 22nd, 2019 by Tanner Wrisley
Dividends play an important role in an investor’s portfolio. A dividend is a distribution from company earnings, paid out to its shareholders. These nifty little payments can have a huge impact on an individual’s performance, taxes, and overall retirement well-being. When properly incorporated in an investor’s portfolio, they can help goose extra return from a stock, beyond the capital appreciation. Here are five facts about dividends that you may not have known:
1. You can receive dividend payments for a stock you do NOT currently own.
There are four important dates to keep track of with regards to dividends, here they are in the order they occur.
Announcement Date – This is the day the company publicly announces they will be paying a dividend to its shareholders. They will also disclose the amount per share, the ex-dividend date, the record date, and the payable date.
Ex-Dividend Date – This might be the most important date to remember because the ex-dividend date signifies when you must hold a stock in order to receive its dividend. For example, Coca-Cola’s ex-dividend date was Thursday, March 14th. In order to receive the dividend, investors had to have purchased Coke on the 13th or earlier so that own the stock when the market opens on the ex-dividend day. This is important to pay attention to because sometimes ex-dividend dates are on Mondays, in which case an investor would need to own the stock at market close on Friday for the dividend.
Record Date – This is the day companies look through their records to see who held their stock at market close on the trading day before the ex-dividend date, therefore determining who will receive dividend payments.
Payable Date – Lastly, this is when the investors get paid. This is usually in the form of cash but can also be in the form of fractional shares.
The only date that determines who will get the dividend payment is the ex-dividend date. So if an individual were to buy Coke on the 13th, and then immediately sell it all on the 14th, she would still receive the dividend payments on the payable date.
2. Dividends lower the market price of the stock on the ex-dividend date.
Think about the example from the last paragraph and imagine that there were no trades of Coke in the market while this individual held the stock. She could buy and sell Coke at the same exact price and receive a dividend, garnishing an automatic profit. This situation is call arbitrage and to combat it, exchanges actually lower the price of any outstanding orders, by the amount of the dividend. Coke’s dividend is $0.40/share. So, had there been zero trading activity between the 13th and the 14th, the stock would have opened $0.40 lower, eliminating the arbitrage opportunity.
3. Some companies do not pay dividends at all.
Dividends can give investors insight into the style of company and where they are in their growth stage. A company like Netflix is what is called a growth stock because they take all of their earnings, and invest them back into their business, paying no dividends whatsoever. Whereas Coke is thought of as a value stock because they return most of their earnings back to their shareholders in the form of dividends, leaving little to invest back into the business for growth. In fact, Coke is one of a number of companies called “dividend aristocrats” that have consistently paid and increased dividends over the last 25 years.
4. Companies pay dividends at different frequencies.
Most companies pay dividends quarterly, however some pay monthly, semiannually, annually, or even on a one-off basis. It is important to look at the annual dividend yield when determining dividend levels across companies with different payment frequencies.
5. You can be taxed differently on dividends from the same shares of stock.
If purchased in a qualified account (IRA, Roth, 401k, SEP, etc.), this point is irrelevant because taxes are deferred. However, when purchased in a taxable account (Individuals, Joints, Trusts, etc.), dividends can be taxed as ordinary income or as a qualified dividend, depending on how long you held the shares for. To meet the holding period requirements for a qualified dividend, the stock must be held for 61 days out of the 121 days (60 before, 60 after) surrounding the ex-dividend date. Our friend who bought Coke and held it for one day would pay full income taxes on the dividends she received. However, had she made the purchase on January 12th and held it until March 14th, her dividends would only be taxed at her capital gains tax rate (usually substantially lower).
Here at Anchor Bay, dividends are vital component to many of our portfolios. Our expertise in choosing stocks with safe, sustainable dividends are one of the strongest values we add to our investment management. Not only do they help generate return on a portfolio, but they also can be a very effective way of generating income for those who take distributions from their portfolios. Dividends are a more predictable source of return than capital appreciation, and have faster tax preferential treatment as well. Dividends make a difference in the investing world, so it is crucial to analyze their use within your portfolio and ensure they are being properly managed.