Understanding Dividend Earning Stocks

When traders and investors look to profit in the markets, they often look to stocks that they believe will grow rapidly in price. However, there is another group of stocks that can not only offer growth potential but a steady stream of income in almost any market condition. This group is dividend-paying stocks. Let’s examine what a dividend is, how it can benefit you financially, and how to choose the correct securities for your portfolio. Additionally, we can explore methods for protecting these investments in market turndowns.

What are Dividend Stocks?

A dividend is nothing more than a share of the profits of a company. When you purchase shares of stock, you are buying a piece of ownership in that company. Through the company’s normal operations, it may make a profit. Sometimes, instead of reinvesting all the profit back into the company, the company shares the money with its owners. As a shareholder, you are an owner and entitled to your portion, called a dividend, if you meet certain criteria. So, a dividend stock is a stock that pays owners a dividend, or a share of the company’s profits on a regular basis, usually quarterly although this can vary.

Companies that offer dividend stock are usually larger, well-established companies with predictable profits. Other securities that trade like stocks such as Exchange Traded Funds (ETF’s), Real Estate Investment Trusts, (REIT’s), and Master Limited Partnerships, (MLP’s) may also pay shareholders dividends.

A chart with a tipped over jar of change depicting dividend stocks

How Dividends Work

There are rules that dictate how dividends are paid and to whom. Those who own dividend stocks or wish to, need to be aware of what these rules are and the corresponding dates in order to properly invest in dividend stocks.

Important Dates for Dividend Earning Stocks:

  • Announcement Date:

    This is the date when the company’s management announces that there will be a dividend and the amount of said dividend. There are no monies paid on this date. All the other dates regarding the dividend will be made public at this time.

  • Ex-Dividend Date:

    Also known as the Ex-Div Date. This is the last day of eligibility for receiving the dividend. To receive the dividend as a shareholder, you must own the stock BEFORE this day. If you buy the stock on or after the ex-div date, you will not receive the dividend as it is said to now be trading ex-div (excluding the dividend).

  • Record Date:

    This is when the company officially records who will receive the dividend.

  • Payment Date:

    This is the time when the company issues the payments of the dividends and monies are credited to the shareholders’ accounts.

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