A dividend is a sum of money paid to shareholders by some companies, that reflect the company’s earnings. Regardless of how a company’s stock price is performing, dividends provide shareholders with a steady return, as they are typically paid out quarterly or twice a year. Not all companies pay dividends, it is usually the more stable and established companies that do. There is also no guarantee to shareholders that dividends will be paid, as a company has the right to stop paying them at any time.
Why Do Companies offer Dividends?
Companies use dividends to pass on their profits to their shareholders as a way of thanking them for their ongoing support in the company, and to keep investors happy! When companies no longer benefit from reinvesting their profits, they will usually pay them out to their shareholders. Therefore, the stock becomes more appealing when a company pays regular dividends to shareholders. Ultimately, the company hopes that this will in turn, increase demand for the stock and increase the stock’s price.
When are Dividends Paid?
If you are a shareholder, you will want to keep these three dates in your calendar when considering dividends:
1. Ex-Dividend Date – share purchases made on or after this day are not entitled to receive a dividend (generally 2 days before the Record Date).
2. Record Date – on this day, the company compiles a list of the all current shareholders, and everyone on that list will receive a dividend payment.
3. Payment Date – the day that shareholders get paid the dividend (usually two or three weeks after the Record date).
Why are dividends so appealing?
Who wouldn’t want a consistent return on a low-risk investment? You can buy shares in a company that has stable earnings, and relax in the knowledge that the value of that initial investment is unlikely to drop substantially, and you will then profit from the dividends received from the company. Another promising advantage, is that as the company continues to grow, the dividends themselves may also grow, and therefore become even more valuable for you.
If you intend to build long term wealth, accumulate shares in well managed, sustainable companies with that pay a steady, growing stream of dividends. For more tips on building a long term investment strategy for smarter portfolio management, get in touch with Share Wealth Systems today.
