What are dividends? The basics

What are dividends? The basics

What are dividends?

Dividends are regular payments of profit made to companies shareholders or in other words investors who own a companies stock. They are paid out in addition to any gains in the value of the company’s shares and reward their shareholders for holding a stock.
Dividends are most often distributed quarterly or yearly (sometimes special one time dividend) and can be paid out in two different types: Cash or in the form of reinvestment in additional stock.
You should keep in mind that not all stocks pay dividends.

So how do you calculate this?

It is important to know that a dividend is paid Per share of stock. So the more you buy the more dividends you recieve. The dividend amount is usually decided by a board of directors which is expressed as dividend yield. More on dividend yield in the next chapter. 
Let's calculate your profit with an example:

Example 1:

If you own 30 shares of a company and that company pays $3 in annual cash dividends (one payment per year) then you will receive $90 per year.
The formula for this is simple: Amount of shares * Annual dividend payment = Amount you will receive in dividends

Example 2:

In this example you bought 15 shares of a companies stock and that company pays 7$  in annual cash dividends (one payment per year).
So the formula would be: 15 shares * $7 = $105
 

So what is dividend yield?

Dividend yield is a stock's annual dividend payment to shareholders expressed as a percentage of the stock's current price. It is important to know this since dividends can be expressed as percentages.
You can calculate this by dividing the annual dividend per share and the stock's price per share and express it as percentages.
The easiest way to imagine this is with an example:

Example 3:

For example, if you buy a stock and it trades for $100 per share and the companies decided to pay out annual dividends at $3 per share. Then the dividend yield is 3%. 
In your case the formula would be: ($3  / $100) * 100 = 3%. 

Example 4:

Let's say that you decided to buy a stock that trades at $30 per share and the annual dividend is $2.5. Then the dividend yield is 8.33%.
 
This are the basics regarding dividends. Make sure to follow our blog to see updates about in depth explanation about dividends and real life examples!

 

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