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What is a dividend – when are dividends paid, what is an ex-date

Updated on March 10, 2024

February 22, 2022

Are you interested in trading stocks but don’t know what it actually entails? Have you chosen a suitable company for investment and are you wondering what your profit will be? No problem, we will explain everything to you. The dividend is the basic thing that should interest you when investing in shares. Along with such concepts as, for example, decisive day. Still don’t know? Does not matter. We’ll cover it for you before your first paycheck arrives.

What is a dividend?

The dividend is what you will certainly be interested in before you decide to invest in the given company. This is the income that the company should provide to its shareholders. It is therefore a reward that companies pay to their shareholders from their net income. And the amount of the dividend depends on it. Therefore, the company must first secure its receivables. This means that it will pay employees, settle debts it has with other companies and pay taxes. Only then can he operate with his net profit. He either invests in his further development or pays them out to shareholders.

So it is necessary to say that the dividend may or may not be paid. It is the right of joint stock companies, not their duty. Therefore, you cannot consider it as a reliable and constant source of income. It may happen that the company decides to invest all the money in its development instead of paying it out. And it pays nothing to the shareholders. Its amount can also depend on whether the company is financially prosperous or declining.

Who pays dividends?

Dividends are paid by joint-stock companies . These are not only companies and multinational corporations, but also various funds. But that doesn’t always have to be the case. For example, if we decide to invest in the shares of a company that is in its very beginnings, we will have to reckon with the fact that initially as investors we will not receive any dividend yield.

Why? Start-ups will need finance themselves to cover the costs associated with launching them on the market. So it’s up to us whether we trust them enough to take any income at first or invest in an established company. It is precisely with well-known and financially sound companies that we can expect regular income from dividends. 

Trading based on dividends

One of the indicators by which investors make decisions is also the amount of dividends. And why not when it can tell us what our return will be? But before deciding to invest in a security based on this criterion, consider the broader context as well. At the same time, rely on various market analyses. You can take into account, for example, technical and, above all, fundamental analysis.

The companies that pay the highest amounts may not exactly be a good buy. Such a company often does not invest in its own development. And that might not be a good indicator for you. Over time, these revenues may decrease depending on the bankruptcy of the company. But this may not apply to large established companies. You no longer have to invest too much money in your development. And that is then reflected in dividends.

You can also choose a company that does not provide any dividend. It can only develop and invest in its further expansion. And that could fetch handsome sums in the future. Or not either. Of course, everything depends on your discretion and the specific situation. Trading on the stock market always carries a certain amount of risk.

When is the dividend paid?

When you will be paid depends on the company. Some have a set regular payout period. These are, for example, quarterly or half-yearly intervals. Others, on the other hand, prefer irregular payments. In that case, it will depend on the company’s revenue. If the business income is higher, or even non-existent, your dividends will be lower, or even non-existent.

Shares and dividend

When buying shares of individual companies, it is possible to choose between two options. You can be either a common or preferred shareholder. Each alternative has its advantages. And other payment conditions. Preferred shareholders receive dividends before ordinary shareholders. Their yield is also fixed. They also have a preferential right to payment when the company ceases to operate.

The disadvantage, on the other hand, is that, unlike ordinary shareholders, they cannot participate in decisions about the future of the company. The vote of an ordinary shareholder then depends on how many shares of the given company he owns.

When will I receive the dividend?

What is an ex-date? And when will your dividends arrive? There are several important terms that are related to the payment of dividends. You should watch out for those. It is you who will determine whether you are entitled to them as a shareholder or not. Among them is, for example, a decisive day. Let’s introduce them one by one.

Date of announcement

The start date for each dividend is the declaration date. This is the day when the company management will announce them. They must be approved by the shareholders before the handover itself takes place.

Ex-date

The ex-dividend date, abbreviated as ex-date, is the day you must hold the stock in order to be entitled to the next dividend. So you have to buy it no later than one business day before the ex-date to be eligible. Otherwise, you are not entitled. Therefore, if the ex-date is set for February 1, you must receive the security no later than January 31. At the same time, it is also the day when you can first sell the share in order to be entitled to the dividend.

Day D

The next important step is the decisive day. On the decisive day, the company registers specific shareholders who are entitled to dividends. By this date at the latest, the company should know to whom it should be paid and to whom not.

Payday

It is simply the day when the company sends out its dividends. And that to all those he evaluated on the decisive day as those who are entitled to them. Each company sets this date itself. This is usually around 30 days from the ex-date.

How is the dividend calculated?

We have already explained the difference between common and preferred shares. Just remember that while preferred shares have a fixed amount, ordinary shareholders’ income varies. The dividend is expressed as a percentage for each such share. Also, how many securities you own affects the resulting percentage that will make up your return.

The final amount credited to you by the company depends on the number of shares as well as how much the company earns. And of course also on the dividend policy. This means that the board of directors must agree on the method of their calculation based on the company’s custom. Subsequently, their proposal is discussed by the general assembly. It is she who always makes the final decision on their amount.

What you can calculate yourself is the dividend yield. But it is not about the exact income you will achieve. Above all, if the company does not pay you dividends regularly and in the same amount, this will not be a decisive figure for you. Its calculation will tell you how many percent the investment in the given security will earn you per year. That is, under the condition that the share price will be stable. You get its value when you divide the dividend you would receive in 12 months by the current share price.

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