Translate This!: “You should reinvest all of the dividends from your stock.”

By: Julio Perez, Fall 2017 IAC Graduate Research Assistant

Dividends! If you are investing in a dividend paying stock, this is a word you’ll want to understand. A dividend is a portion of a company’s profit paid to shareholders of certain stocks. Companies tend to distribute their dividends to stockholders at scheduled intervals.

The most common form of a dividend is in cold hard cash, where the stockholder is paid directly according to their share of the company. The next most common form of payout is in the form of further stock, paid either in whole or partial shares. The last method of payout is what is called “extraordinary dividend,” which is when the company distributes cash previously held back to shareholders.

The important question that remains is how can you tell if a share of stock has a good dividend payout? This payout is called yield. An asset’s “yield” is the percent return paid over 1 year. You have to do a bit of math to calculate this rate, unless the yield is already advertised along with the stock. The equation for yield is the sum of the last four quarterly dividends (companies tend to pay out dividends in quarters), divided by the price of the stock multiplied times 100. So if your dividends pay you back $1.00 per share after four quarters, and the price for a single share of stock is $5.00, then the stock has a 20% yield (1/5 x 100= 20, note, 20% is an extremely high stock yield, if you ever see figures north of this number be ready to call shenanigans).

One last quirk about dividends that should be explained is the “ex-dividend date” or “ex-date.” When a company decides to offer dividends on its stock, it sets a date of record which is the date a stockholder must be registered in the company’s books to receive a dividend. The ex-dividend date is set by the stock exchange itself, and it is the very last day when a stockholder can buy stock and be entitled to the next dividend payout. If they buy the stock on that day or after, they skip the first quarterly’s payout. Although this means that the unwary stockholder will only be missing out on a few cents’ payout, this goes to show how investors can lose money virtually any time they don’t know the ins and outs of the stock market.

Translated: “You know those pennies that you get every few months for your fruit leather stock? Just use it to buy more stock.”