Learning the language of dividends

BONDY ON MONEY

April 23, 1995|By SUSAN BONDY | SUSAN BONDY,Creators Syndicate

Over the past 50 years, dividends have accounted for almost two-thirds of total returns on stocks. Given that fact alone, it becomes quite important to understand the language of dividends:

Q: What is the difference between "dividend" and "yield"?

A: Dividend and yield refer to the same thing -- the portion of a company's profit that is paid to its owners, the stockholders. The dividend is the actual dollar amount paid. The yield is the dividend as a percentage of the stock price.

The yield is calculated by dividing the annual dividend by the current market price of the stock. If a stock sells for $40 a share and has paid dividends of $2 over the past year, its yield is 5 percent.

Q: How do I know what my next dividend will be and when I will get it?

A: Dividends are declared by the board of directors of the company at its regular meetings. The dividend may be declared quarterly (the most common practice), semiannually or annually. BTC Most of the time, the dividend will be the same or higher than the previous dividend. But dividends can also be reduced and even eliminated.

The board of directors announces the amount of the dividend to be paid, the date on which the dividend will be paid and the record date -- the date on which the company "freezes" the records. The owner-of-record on the record date is entitled to receive the declared dividend. For example, XYZ Co. declares it will pay a quarterly dividend of 50 cents a share March 3 to the owner-of-record Feb. 3. As long as you are the owner-of-record Feb. 3, you will receive that dividend.

Q: What does the term "ex-dividend" mean?

A: When a stock is quoted "ex-dividend," it means that new buyers are no longer entitled to the recently declared dividend. A stock generally goes ex-dividend five trading days before the record date because it takes five trading days to do the paperwork for the trade to settle.

In the example above, the ex-dividend date will most likely be Jan. 27. That means anybody buying the stock after Jan. 27 will not be entitled to the March 3 dividend.

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