Dividend Stocks: Key Basics You Need To Know

It’s Friday. Time to give you a stock pick from our sister newsletter, The Spill, so you can think about it over the weekend and maybe make a move Monday morning. While The Juice helps you be better with money across the board, The Spill focuses on stocks financial pros are researching and judges how good of buys they are. If you’re already sold, you can sign up for The Spill – for free – here.

As we noted in yesterday’s Juice on Gen Z’s housing market prospects, a reader said they wanted to hear more about dividend stocks. We get this request a lot. And we love dividend stocks. 

So, today we start from the beginning with a primer on the basics you need to know. Then, tomorrow, we clear up some of the euphoria and false hope that tends to exist around dividend stocks as income generators, particularly in retirement. 

Some of today’s terminology is key to best understanding what we discuss on Wednesday. It’s also relevant to the recent discussion we had when we defined special dividends in relation to Costco (COST). 

A dividend is simply a payment a company makes, from its profits, to shareholders. Most often, companies distribute dividends quarterly. However, some companies pay out monthly. A few have issued one-time special dividends in addition to their regular payments. Costco is among the best known for this.

The dividend payment you see listed alongside many stock quotes is per share. So, a $0.50 quarterly dividend means you collect $0.50 for every share of stock you own in a given quarter. If you own 100 shares of a stock paying a $0.50 quarterly dividend, that’s $50 in a given quarter. 

The Most Basic Dividend Terms

Declaration Date. The day a company announces its dividend payment. 

Ex-Dividend Date. You must own a stock before this day in order to receive the next dividend payment. The seller of the stock takes the dividend if you buy the stock on or after the ex-dividend date. 

Record Date. The date you might be officially a shareholder in a company’s ledger. For all intents and purposes, you must buy a stock two a minimum of two business days’ prior to the ex-dividend date to ensure you’re logged as an official shareholder by the company. 

Payment date. You guessed it. The day a company actually pays its dividend to shareholders of record. 

The Most Important (Retirement-Related) Dividend Terms

This terminology matters generally, but comes into specific play when we consider the role of dividend-paying stocks in retirement. 

Dividend yield. To illustrate, let’s use Verizon (VZ), which is the dividend-paying stock financial professionals have been searching for most (after Apple (AAPL)!), in our Trackstar database. 

As we write this, VZ has a dividend yield of 6.89%. This is pretty high. Dividend yield shows us how much a company pays in dividends relative to its share price. You calculate dividend yield using this formula: Dividend yield = annual dividend / stock price x 100. 

In VZ’s case, it looks like this. Divide its annual dividend payment of $2.68 ($0.67) per quarter by its $38.88 stock price X 100 and you get 6.89%. 

So, in real world terms. If you own 100 shares of VZ. At $38.88, it has a value of $3,888. 

6.89% of $3,888 is $268 (after rounding up from $267.88). 

This jibes with that annual dividend payment of $2.68 per share, given that $2.68 times 100 (shares) equals $268. 

Pretty straightforward, right? It is. Until it’s not. 

In tomorrow’s Juice, we dig into two of the main things to look out for when investing in dividend stocks:

1. Dividend yield traps. As the price of a stock goes down, its dividend yield goes up, assuming no change to the dividend. VZ hasn’t been a great performer lately. 
2. You need to own a lot of stock. To generate meaningful income from a dividend-paying stock, you need a relatively large amount of capital invested. 

Dividend reinvestment. This is crucial to many dividend stock strategies. And it can help you build a sizable position that might — someday — throw off meaningful income. 

When you purchase a dividend stock, your brokerage will give you the option to reinvest dividends. If you select this option, every time you receive a dividend payment, you won’t receive it as cash to keep. Instead, your brokerage will reinvest into new shares of the stock. 

Outside of the taxes, you might have to pay on this dividend payment, that’s essentially “free money” being used to build your position and effectively increase — all else equal — the size of your future dividend payments. 

Shortly after tomorrow’s retirement-specific Juice on dividend payers, we’ll do separate installments on dividend taxes and the power of dividend reinvestment. 

So much to consider. But, don’t worry, The Juice has you covered. 

The Bottom Line: Like so much else in today’s world, dividend investing has taken on a life of its own, complete with people who swear by it as the end all and be all and those who think it’s the worst strategy ever. As with most things in this polarized world, the truth sits somewhere in the middle. 

We’ll start defining that middle tomorrow. Preview: We love dividend stocks, but we would not stake our future solely on them.

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