Dividends are payments made to stockholders in exchange for holding shares of the company.
Not all stocks pay dividends but many do. It is estimated that around 75% of companies in the S&P 500 pay regular dividends.
A dividend is paid for each share of the stock owned, at a specific date. For example, by owning 100 shares of a stock that pay a $1 dividend, you will receive a $100 dividend on the payement date.
Dividends are usually paid in cash, but can also be paid in stocks. Companies can pay a dividend yearly, quarterly or even monthly for some of them.
At the declaration date, a company accounces its next dividend payement. Investors must own the stock before the ex-dividend date in order to receive be eligible to receive the dividend on the payment date.
Dividends can be a good thing for investors such as retirees that want a steady stream of cash, without having to sell stocks. Some companies pay dividends to be attractive to those dividend investors that look at metrics such as dividend yield more than other metrics.
However, paying dividends has some disavantages as investors must pay taxes. Companies may should alternative ways to return value to shareholders without paying dividends, by either reinvesting the cashflows in the company itself or doing share buybacks.
Sometimes, paying dividends can also be an indicator that the company has no better use of its cashflows.
The dividend yield is the amount of dividend paid per share compare to the share price.
For example, if a company has a share price of $100, and pays a dividend of 8$ per share, the dividend yield would be 8%.
The dividend payout ratio compares the total amount of dividends paid to shareholders with the net income of the company.
Some companies can have a payout ratio other than one. This can be a red flag as this situation is not sustainable in the long term, because it means that the company pays more in dividend than what it earns.
Some companies such as Real estate investment trusts (REITs) have an obligation to distribute at least 90% of their taxable income as dividends.
Dividend Aristocrats are companies that are known for having a very long track-record of continuously paying dividends for at least 25 years, but also have increased their dividend in each of those 25 consecutive years.
Some people even add some additional criteria for a stock to qualify as a Dividend Aristocrat such as having a market capitalization of more than 3 billion dollars, and a daily trading volume of more than 5 million dollars.
Dividend Kings is a similar concept as Dividend Aristocrats, but to qualify as such, companies must have increased their dividend for at least 50 consecutive years.
As the criteria for being a Dividend King is a longer period of time, Dividend Kings tend to be less common than Dividend Aristocracts.