It seems that until the results of the last quarter of the previous year are presented, the ghosts of 2022 will continue to be present with us. For your investment training, we are pleased to publish content that is of great help to prepare for situations that occur in the markets. These situations can range from catalytic events that increase volatility, how to prepare for the results seasons o strategies within the crypto ecosystem to increase your holdings. Today we bring you one of those articles that you like so much, that your investment training appreciates. We will analyze what dividends are, one of the factors most followed by the great Warren Buffett.
What are dividends?
Let's start this investment training by defining what dividends are. Dividends are a part of the corporate profits that a company has generated, which is delivered to the company's shareholders as remuneration. These remunerations are not obligatory to be distributed by companies, it is a way for companies to distribute the profits generated among the company's investors. Companies can usually decide to reinvest the profits in the company itself for the growth and development of the business and allocate a portion to the payment of dividends to investors. The payment of the dividend is always approved at the General Shareholders' Meeting proposed by the board of directors.
What are dividends for?
Dividends are a payment paid to investors with part of the profits that the company has generated. Companies considered high growth do not usually offer dividends because they allocate profits to reinvestment to continue maintaining business growth. Although sometimes these payments are made to compensate for the low volatility that may be present in the price of an asset. At the same time, the distribution of dividends also encourages investors to invest more capital in a company in search of passive income, while it is a good way for companies to continue obtaining financing from investors.
What types of dividends are there?
Mainly we can distinguish dividends between whether they are gross or net. This may vary depending on whether the distribution of the dividend includes the payment of taxes established on the profits. Below we can find different ways to compensate this payment:
- Share dividend: The most common distribution of dividends is usually made based on the distribution of company shares to investors.
- Cash dividend: This type of dividend is a payment made to the shareholder in cash in advance of the profit generated by the company.
- Dividend supplement: There are certain times when the payment of cash dividends may be accompanied by a dividend supplement, that is, an extra payment that is added to the cash payment.
- Extraordinary dividends: No, they are not the best dividends because they have the adjective “extraordinary”. These dividends are those that are distributed exceptionally when the company has generated an additional profit than the initial one.
- Fixed dividend: This type of dividend is a distribution of shares or cash set by the company, without taking into account the profit it has generated.
When are dividends paid?
Interesting question that we are going to develop in this paragraph, which will also help you to design strategies for your investment training. The distribution of dividends is defined by the company that distributes them. There are some that may offer an annual, semi-annual, quarterly or even monthly dividend payment. This makes it easier for us to invest in companies that distribute dividends strategically through a dividend distribution calendar. Of course, it should be noted that the payment of dividends is governed by a series of dates:
- Dividend announcement date: This date is when the company's General Meeting announces the value of the dividend.
- Ex-dividend date: This date, understood in a general context, is the deadline to enter the list of shareholders who own shares, which will grant them the right to receive the payment of the dividend. This is because the acquisition of shares may take some time to pay off. In this way, any problem with the ownership of the shares when distributing the payment of dividends is avoided.
- Record date: On this date the company declares the shareholders qualified to receive the dividend payment.
- Payment date: The date expected by shareholders is the day on which dividends are paid. It should be noted that different periods may pass between the ex-dividend date and the dividend payment date depending on the decision of each company.
What to consider about dividends?
Now that we have delved into this training in dividend investing, we are going to review a couple of issues to take into account when looking at stocks that offer dividend distribution:
Dividend yield.
One of the first questions we have to look at when investing in stocks that distribute dividends is to check the dividend yield. The dividend yield allows us to calculate how much we could earn with the dividends that a company distributes in a year. The formula for calculating the dividend yield is based on dividing the value of the dividend per share (value of the dividend payment per share) by the price of the share and multiplying it by 100.
With this value we already have the profitability that the dividend offers us, we only have to multiply this percentage by the number of dividend distribution dates that a company offers to know the annual profitability that we will earn with the payment of said dividends. Let's take an example; I have shares of a company which is going to distribute a quarterly dividend per share with a dividend payment of 1 dollar. This stock is trading at $4, therefore the yield on that dividend would be 25% (1/4 = 0,25 x 100 = 25%). We then multiply this value by the number of dividend distribution dates to discover the annual profitability that said dividend can offer us. In general, a dividend that offers a return of between 2-6% is considered optimal, accepting up to a recommended maximum of 10%. Although we must take into account two other factors regarding the dividend analysis…
Current price of the shares paying the dividend.
We may be analyzing the market in search of stocks that distribute dividends and we come across a stock that offers a dividend with a very juicy return. This is one of the factors that we have to be cautious about when investing in stocks that distribute dividends. This is because the payment of dividends with high returns can be linked to companies where the share price is weakened. This may be a red flag, given that these companies in question may be offering this sweet dividend to try to save the day due to financial or operational difficulties. Therefore, the higher the dividend payment, the greater the risk that investing in said company may entail. At the same time, we must take into account that these returns they offer are sustainable for the…
Historical dividend yield.
One of the pillars of a good investor is to achieve profitability, that is, to generate constant profits over time. The same thing happens with dividend payments, which is why we must be critical when choosing stocks that distribute dividends based on the historical dividend profitability. When we mentioned that we have to distrust dividends that offer high returns, it is basically because of the concept of profitability. If a company offers a dividend with a very high yield, it must therefore maintain these payments for the following dividend distribution dates.
This fact is vital given that if we offer a dividend that we will not be able to maintain (or increase) over time, the investor will not feel encouraged to invest in shares of the company in question. This in the future may lead the company to lower its dividend payment, which will reduce investors' desire to reinvest in the company. In turn, a history of dividend payments can give us valuable information about the company's management and the possible value of the next dividend payment.
Dividend payout ratio.
This is a very useful metric to determine the value of dividends paid to investors to see how the investor is rewarded based on the profits generated by the company. Let's take an example to understand this metric; Let's say that a company has generated a profit of $700.000, has a total of 600.000 shares in circulation and pays a dividend per share of 0.80 cents.
First we are going to divide the company's profit (700.000) by the number of shares in circulation of the company (600.000). We will divide the figure we get (1,16) by the dividend payment per share (0,80). Finally, we take the resulting figure (0,68) and multiply it by 100 to find out the percentage of profits that the company has distributed to shareholders. In this case, the company we have given as an example has distributed 68% of its profits to investors in dividends, reserving the remaining 32% to reinvest in the company. Additionally, it is also very helpful to consult the dividend yield growth ratio to determine the strength of the payment of said dividends.
Where can I consult the dividend distribution calendar?
There are multiple options where we can consult the dividend distribution schedule of listed companies. Among these options we can highlight the website of Dividend Stocks, where we can have a very useful tool that allows us to filter the selection of stocks that offer dividends along with their evaluation metrics, such as the dates to take into account, the number of payments made annually, the profitability of the dividend, the country of origin... At the same time, they publish an updated weekly and monthly calendar with the companies that distribute dividends during that period of time.
In the example that we show in the graph, we have filtered the Spanish shares that offer a dividend yield greater than 5%, which has shown us that the shares of Enagas (ENG), Telefónica (TNE5), Prosegur ( PSG), ACS, Red Eléctrica (RE21) and BBVA.
Conclusions from this dividend investment training.
Today's article for your investment training is intended to prepare you for the beginning of the year, given that the season for presenting results for the last quarter of the previous year will soon begin. Consequently, this data can help us glimpse which stocks are going to offer the best returns on the dividends they offer. We have learned about what dividends are, the types there are and what factors we should base on when analyzing them. A highlight of dividends is the opportunity they give us to earn passive income on the investments we make for our portfolios. Although it is worth remembering that a good investment is also required for passive income to generate a considerably profitable figure. At the same time, we recommend defining a strategy to make an investment in shares that distribute dividends in order to maximize profits and protect our capital against possible losses.