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Live Off Dividends

Dividend Lingo 101: Master the Terminology and Maximize Your Returns

Updated: Jan 26, 2023

Dividend Lingo 101: Master the Terminology and Maximize Your Returns

Understanding dividend-related terminology can be the key to unlocking higher returns on your investments.

By learning about terms such as dividend yield, payout ratio, and ex-dividend date, you can identify companies that have a history of paying consistent and reliable dividends. This can help you build a portfolio of stocks that not only have the potential for capital appreciation but also provide a steady stream of income.

Additionally, by understanding the tax implications of dividends, you can make strategic decisions that can help boost your overall returns. In short, taking the time to understand dividend-related terminology is an investment in your financial future.

So, let's get started!

What is a Dividend in Stocks

A dividend is a payment a company makes to its shareholders. It's a portion of the company's earnings, decided by the board of directors, that is given to shareholders. Dividends can be given in cash, shares of stock or other forms.

When a company makes a profit, it can either keep the money or give some of it to shareholders as dividends. The amount of the dividend is usually a fixed amount or a percentage of the stock price.

Dividend-paying stocks can be a good investment choice for those who want a steady income, but it's important to remember that dividends aren't guaranteed and they can change or stop.

You can find out what is the dividend paid by a certain company using different tools and it is usually for free. Here is how you can see it for AAPL on a simple "Dividend AAPL" Google Search:

Dividend of Apple
Dividend of Apple. Source: Google Search

What are Dividend Tax Rates

Dividend tax rates refer to the tax that investors have to pay on the dividends they receive from owning shares in a company. The tax rate on dividends can vary depending on the country or jurisdiction in which the investor resides and the type of dividends received.

In some countries, the tax rate on dividends can be lower than the tax rate on other types of income, such as interest or capital gains, in order to encourage investment in companies.

You can find the dividend tax rate for your country using OECD.stat.

It's important to note that the tax laws are subject to change and are different by country, it's always a good idea to check with a professional tax advisor or your local tax office to understand the tax rules and regulations that apply to you.

Calculating the Dividend Yield

Dividend yield is a way to measure how much money you will get back from a stock investment based on the dividends paid by the company. It is usually shown as a percentage of the current stock price. To calculate it, you divide the annual dividends by the stock price:

Dividend Yield = (Annual Dividend per Share) / (Current Stock Price per Share)

For example, if a stock is $50 and pays $1.50 in dividends per year, the dividend yield is 3% (1.5/50=0.03).

Although you usually don't have to calculate it by yourself, as it is publicly given, it is useful to understand how that numbers is calculated.

Below is a real example using dividend of T:

Dividend for T
Calculating the Dividend Yield. Example on AT&T stock.

It's important to remember that dividend yield does not guarantee future performance and the companies can change or stop dividends, also the stock price changes can affect the dividends yield. It's a good idea to research the company and its financial health before investing.

What is the Dividend Payout Ratio

The dividend payout ratio is a way to measure how much of a company's profits are given to shareholders as dividends. It's shown as a percentage and you calculate it by dividing the dividends paid per share by the earnings per share (EPS).

Payout Ratio = (Annual Dividend per Share) / (Earnings per Share)

For example, if a company has EPS of $2 and pays $1 in dividends, the payout ratio is 50% (1/$2).

Below is a real example using Dividend for MO:

Calculating the Payout Ratio
Calculating the Payout Ratio. Example on Dividend for MO

A low payout ratio means the company is keeping more of its profits to invest or pay debt, while a high payout ratio means the company is giving more profits to shareholders.

It's important to keep in mind that a high payout ratio can also mean that the company may not have enough profits to pay future dividends or invest in the future.

What are Ex Dividend Dates

Ex-dividend date is the date when a stock is traded without the right to its most recent declared dividend. If you buy a stock on or after the ex-dividend date, you won't be able to receive the next dividend payment. This means the stock is being traded "ex-dividend" (without the dividend).

It's important to remember that the ex-dividend date is not the same as the payment date, which is when the dividend is paid to the shareholders. Investors should keep in mind the ex-dividend date when buying or selling stocks to make sure they receive dividends or not.

What is a Dividend Record Date

The record date is the date when a company makes a list of its shareholders to decide who will receive the dividends. The company will check its list of shareholders on this date, and whoever is on the list will receive the dividends.

On the record date, the company will usually close its books, which means that if you buy the stock after this date, you won't get the upcoming dividends. Investors should pay attention to the record date to make sure they will receive the dividends if they own the stock on this date. The record date is usually set after the ex-dividend date and before the payment date.

When is the Dividend Paid

The dividend payment date, also known as the "payment date," is the date on which the company distributes the dividends to its shareholders. This date is set by the company's board of directors and is usually announced along with the dividend amount and ex-dividend date.

On the payment date, the dividends are paid out to shareholders who were on the company's books on the record date. It's important for investors to pay attention to the payment date to ensure that they receive their dividends and also to plan for the cash flow. The payment date is usually set after the ex-dividend date and the record date.

How Often is a Dividend Paid

Dividends are typically paid on a regular basis, such as quarterly or annually. Some companies pay dividends on a monthly or semi-annual basis, but this is less common. The frequency at which a company pays dividends is determined by its board of directors and is typically based on the company's financial performance and cash flow.

Quarterly dividends are paid four times a year, typically at the end of each quarter. Companies that pay dividends quarterly tend to have a stable financial performance and cash flow, and they tend to pay consistent dividends over time.

You can easily find What are Ex Dividend Dates, What is the Dividend Record Date, When is the Dividend Paid, and When is the Dividend Paid for a particular stock using publicly available information. Here is how this information looks on SeekingAlpha in the case of Dividend for IBM:

Investing in a REIT

REITs are companies that own and operate income-producing real estate such as buildings and properties. They allow individual investors to invest in these real estate portfolios, similar to how they might invest in other industries through stocks.

REITs pay out a large portion of their income as dividends to shareholders, making them a good source of steady income. They can be publicly traded on stock exchanges or privately held and can focus on specific types of properties or be diversified.

REITs offer a way for people to invest in real estate without having to own and manage properties themselves. Keep in mind that REITs have the same risks as other publicly traded companies and can be affected by changes in the real estate market.

1. Stag Industrial (STAG)

2. Realty Income (O)

3. Omega Healthcare Investors (OHI)

4. Medical Properties (MPW)

5. Iron Mountain (IRM)

6. Crown Castle (CCI)

REITs Dividends
REITs Dividends

Blue Chip Stocks with Dividends

Blue chip stocks are shares of well-established and financially stable companies that have a long history of consistent growth and a strong track record of paying dividends. These companies are typically leaders in their industry and have a reputation for providing a stable return on investment.

Blue chip stocks are considered to be less risky than other types of stocks, as they are less likely to be affected by market fluctuations or economic downturns.

The Dow Jones Industrial Average (DJIA) which comprises 30 blue-chip stocks that are considered to be the leaders in their respective industries

Some examples of blue chip stocks are:

1. General Electric (GE)

2. Procter & Gamble (PG)

3. Coca-Cola (KO)

4. Home Depot Inc. (HD)

5. Walmart (WMT)

6. Visa (V)

Blue Chip Stocks with Dividends
Blue Chip Stocks with Dividends

It's important to note that while blue chip stocks are generally considered to be less risky, they are still subject to market fluctuations and the performance of the specific company. As with any investment, it's important to do your own research and consult with a financial advisor before making any investment decisions.

Share Buybacks vs Dividends

A company may use its profits to buy back its own stock or pay out dividends to shareholders as a way to return value to shareholders.

A share buyback, also known as a stock buyback, is when a company repurchases its own shares from the market, which can increase the value of remaining shares by reducing the overall number of outstanding shares. This can also boost the company's earnings per share (EPS) ratio, which can make the stock more attractive to investors.

A dividend, on the other hand, is a distribution of a portion of a company's profits to its shareholders. Dividends are typically paid out on a regular schedule (such as quarterly or annually) and can provide a stable source of income for shareholders.

Both share buybacks and dividends are ways for companies to return value to shareholders, but they work differently. Share buybacks can boost a company's stock price by increasing earnings per share, while dividends provide a regular source of income to shareholders. Some companies may choose to do both, while others may focus on one or the other.

Companies with Stock Buybacks

There are many companies that have engaged in stock buybacks. Some of the larger companies that have recently announced or completed buyback programs include:

  • Apple

  • Cisco Systems

  • General Electric

  • IBM

  • Microsoft

  • Oracle

  • Procter & Gamble

  • Qualcomm

  • Wal-Mart

Keep in mind, this is just a small sample of companies that have announced or completed buybacks recently, and many other companies also engage in buybacks. The frequency and size of buybacks can change depending on a company's financial performance, cash reserves, and other factors.

Additionally, the companies listed above might not be currently doing buybacks, they are just examples of companies that have done so in the past.

Bottom Line

In summary, understanding dividend terminology is crucial for making informed investment decisions and evaluating the performance of a company's stock. Familiarizing oneself with terms such as dividend yield, payout ratio, and ex-dividend date can help investors make more strategic decisions and potentially increase their returns.

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