The Low Down On Dividends

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
- John D. Rockefeller

What Are Dividends?

Today I wanted to take some time to talk about dividends.  For those of you new to investing, dividends are cash distributions that companies pay directly to their shareholders.  When a company earns a profit the money can either be re-invested in the business (retained earnings) or paid out to shareholders in the form of dividends.  These cash payments are usually paid out on a quarterly basis, although some are paid out annually or semi-annually.  For example, Nike (NKE) pays a quarterly dividend of 25 cents a share ($1 per year).

Important Dates

When it comes to investing in dividend paying stocks there are a few important dates to keep in mind…

Declaration Date – This is the date the company’s board of directors sets and announces amount of the next dividend.  Now the company is legally obligated to pay the dividend to shareholders.  Here is Nike’s recent dividend declaration for the next quarter…

“NIKE, Inc. (NYSE: NKE - News) announced today that its Board of Directors has declared a regular quarterly cash dividend of $0.25 per share on the company’s outstanding Class A and Class B Common Stock. On an annual basis, this is an indicated rate of $1.00. The $0.25 quarterly dividend, which represents a nine percent increase over the previous quarterly rate of $0.23 per share, is payable on January 5, 2009 to shareholders of record at the close of business on December 8, 2008.”

Ex-Dividend Date – On this date all shares bought and sold no longer come with the right to receive the next quarterly dividend.  Anyone purchasing shares who wants to receive the next dividend need to purchase them before the ex-dividend date.  Similarly all shareholders who wish to sell their shares and still collect their final dividend need to sell them after the ex-dividend date.

Record Date – All shareholders who properly register their ownership on or before this date will receive the dividend.  Since your shares are normally held in a brokerage account you don’t have to worry about doing anything.  Your broker will take care of everything for you.

Payment Date – This is the day you’ve been waiting for.  It’s the day your dividend check is mailed or your brokerage account is credited.  In the case Nike, shareholders will receive 25 cents for every share they own.

Dividend Re-Investment Plans

Dividend Re-Investment Plans or DRIPs allow shareholders to systematically buy small amounts of stock each quarter with their dividend proceeds.  Usually these plans don’t charge commissions so they are ideal for investors with smaller amounts of money.  Over time DRIP investors can achieve great returns as their dividends and shares compound.  Some well known companies that offer DRIPs include Coke (KO), Procter & Gamble (PG), and McDonalds (MCD).

Now that you know the basics about dividends, stay tuned for my next post on how you can yield wealth through dividends.  Here’s a hint… from 1872 to 2003, 97% of the stock market’s returns came from re-investing dividends according to Wharton’s Jeremy Siegel.