Dividend stocks, part 1: What they are and how they work

• Dividend stocks can be a great way to earn regular income and potentially grow your investment over time
• There are several important dates to keep in mind when you buy a dividend stock
• Companies that pay dividends on a consistent basis are typically well-established and profitable but likely not in a period of very rapid growth

Dividend stocks are shares in companies that pay out a portion of their profits to shareholders on a regular basis. These payments are known as dividends.

Many investors find dividend stocks attractive because they can generate income but also have the potential to grow over time.

The dividends that companies pay to their shareholders usually come in the form of cash but are sometimes paid as additional stock. These payments are a share of the company’s earnings and typically distributed on a regular schedule — quarterly is the most common; monthly or annually are also possible. The amount of the dividend can vary based on the company’s performance, financial health and its dividend policy.

Not all companies choose to pay dividends. Those that do can provide an investor with a steady stream of income in addition to any gains in the stock’s market price.

One main reason that companies pay dividends is to reward shareholders. When you buy shares in a company, you’re essentially becoming a part-owner and the dividend is your share of the profits.

Companies also use dividends to attract and keep investors. Consistent dividends can make a stock more appealing, especially to those looking for regular income, such as retirees.

Companies that pay dividends are typically well-established and have a history of being profitable. Part of the reason for this is that companies usually want to be confident that they can maintain the same level of dividend payout quarter after quarter. They realize that investors don’t like it when dividends are reduced or inconsistent. Also, companies in their earlier growth stages may be better served by reinvesting profits back into their business to ensure that growth is sustained or even accelerated.

When a company decides to pay a dividend, also known as “declaring a dividend”, it will announce the dividend amount and important dates connected to the dividend payout.

Here’s a summary of those dates:

Declaration date

This is the date the company announces it will pay a dividend. This often happens at the same time as the release of its quarterly earnings results. The announcement includes the amount of the dividend, the record date and the payment date.

Last purchase date

This is the last day that you can buy the stock if you want to receive the upcoming dividend. Since stock trades take one day to settle, this date occurs one day before the Record Date.

Ex-dividend date

The stock price adjusts lower on the ex-dividend date by the amount of the dividend to reflect the fact that investors who buy the stock on that date won’t receive the upcoming dividend. For North American-listed stocks, the record date and the ex-dividend date are the same date.

Record date

On this date, the company reviews its records to determine who owns the stock. If you’re on the list on the record date, you’ll receive the dividend.¹

Payment date

This is the day the dividend is paid out to shareholders. The amount you’ll receive is in proportion to the number of shares you own. For example, if you own 100 shares and the dividend is $1 per share, you’ll receive $100. The money is usually deposited directly into your brokerage account. Note that if you receive a foreign dividend, foreign dividend tax is usually withheld.

Here’s a recap of the timeline, using fictitious dates in this example.

In our recap, the declaration date is June 1, followed by the last purchase date to receive the dividend on June 12. These are followed by the ex-dividend date and record date, both on June 13 and finally, the payment date on June 25.

At Investor’s Edge, you can set up your account with a Dividend Reinvestment Plan (DRIP), which means your dividend payment will automatically be reinvested by buying more shares of the dividend-paying company. Over time, the number of shares you own will increase and lead to higher dividend payments.