According to S&P Dow Jones Indices research, dividends made up around one third of the total return of the S&P 500 Index between 1926-2012. That's a huge chunk of the total-return pie and suggests that you need to pay keen attention to such payouts. But do you know how to find out the right information and what it all means?
When will you get paid?
If you own a dividend paying stock, you'll probably be interested in knowing when you'll get your dividend. The best place to go is directly to the company, since it likely puts out news releases explaining the specifics of its distributions. That's generally the most reliable source.
However there are also other places, like Nasdaq's dividend calendar (similar calendars can be found at other finance related sites) or news feeds on stock quote pages (where you'll likely find a company's news releases). A dividend calendar won't give you the nitty gritty details of a press release, but you'll get the basics.
(Source: Public Domain, via Wikimedia Commons)
And finding information on more than one company will be quicker at those sites than by surfing to every corporate home page in your portfolio or on your watch list. However, you'll quickly see that finding this information is only half the battle. In fact, dividends aren't nearly as simple as they first appear.
First things first
Perhaps the most important thing about dividends is yield. You get that by taking the most recent quarterly payment, multiplying it by four, and then dividing by a stock's share price -- most of the time. A few things to watch for here are dividend frequency (how often a dividend is paid), and irregular and special dividends.
European companies often pay semiannual dividends with one of the two distributions is larger than the other. In this situation you'd be better off adding the last two payments and dividing by the share price. There's also an increasing number of companies that pay dividends monthly. In this case, you'd need to multiply the current monthly dividend by 12 to get the right yield. Dividend information, including yields, for semi-annual and monthly payers is frequently wrong on finance websites.
The other thing to pay attention to is special dividends. If a company pays a regular dividend, but, for whatever reason, pays out a large one-time dividend, you'll need to look at the regular dividend to compute an accurate yield. Sometimes special dividends get included in the yield calculation on finance sites, making the yield look larger than it really is.
Such payments, however, can be a "regular," though variably sized, occurrence at some companies, most notably closed-end funds (capital gains distributions in this case). That can make it harder to figure out a yield that can be considered a baseline. In most cases the best bet for conservative income investors is to look at the regular dividend and consider any extra payment as a bonus.
What's with all the dates?
The next thing you may need to get a handle on is the collection of dates that surround a dividend. The first date is the Announcement Date, which is when the company tells the world that it's going to pay a dividend. Next up is the Record Date (or Date of Record), which is the date the company uses to determine who is a shareholder and, thus, has a right to the dividend. The third date to consider is the Payment Date -- which is when you'll actually see the money.
(Source: From collection of JMWinkworth, via Wikimedia Commons)
However, the most important date may well be the Ex-Dividend Date. It takes a couple of days for a stock trade to be fully processed and for you to show up on a company's records. Thus, you'll need to execute a trade about two days before a Record Date to make the list. This is the Ex-Dividend Date, and most companies will actually provide you the specific date and almost all dividend calendars are based around this date because of its importance.
Now what?
If you are a long-term investor, it's good to know all of this information. However, most of the above dates won't be that important. That said, these dates can help explain why you may not have received a dividend on a new purchase that you thought you were entitled to or whether or not you'll get a last distribution from a stock you've recently sold. You can also use dividend dates in a broad sense if you want to spread your distributions out, owning a portfolio of companies that ensures a payment occurs every month.
Long-term investors, however, will probably want to pay attention to the timing of annual dividend hikes. That's a longer-term calendar issue that can be fairly important. Failing to hike a dividend after years of regular increases should be seen as a warning sign that business conditions (internally and/or externally) are changing and spur you to review your logic for owning a company.
For active investors, these dates can be more important. Dividends and dividend dates can have a material impact on returns in options strategies like selling covered calls. You'll want to make sure you know exactly when you need to own a stock to get the dividend. Some investors also try to trade around dividend payments, called a dividend capture strategy. In essence, the dividend capture investor wants to own a stock just long enough to get the dividend and then sell and move on to another stock. Clearly, knowing and understanding dividend dates is vital to getting this to work.
In the end, you can survive without knowing or understanding the specifics of dividends and their lingo. But you'll be better off now that you do.
