NEW YORK (MainStreet)Dividends are an added bonus to any investor's portfolio, because of the high volatility they creates and the funding they provides. After a dividend is announced, the share price of the stock usually rockets up due to the potential dividend the investors could inherit. But when the ex-dividend date hits, the stock price usually declines.
Dividends, quite simply, are funds allocated to investors or shareholders by a security due to a specific profit margin reached by the company. Not all securities provide a dividend. Unlike quarterly earnings reports and other data where there is a set released date each quarter, there is no specific date that a company releases its dividends.
When investing in stocks that possess dividends, there are three objectives that you should keep in mind. The ex-dividend date (the date you must contain the stock), the pay date (the date you receive the funding), and the date of record (two days after the ex-dividend date).
Many investors trade when dividends are released to gather the dividend payment. To do this, the investor has to buy the stock or security one day before the ex-dividend date. Let's say that an ex-dividend date is planned on a Friday. If you purchased the security on a Thursday, you would receive the stock and the dividend on the date of record which would be on the following Tuesday. Even though you didn't contain the stock before the ex-dividend date, you will still receive the dividend. The latest you could have bought the security would have been Thursday, and by the following Tuesday's "date of record," all investors and shareholders are eligible to receive the dividend. Anytime after the ex-dividend date, you can sell the stock and still receive the dividend.
A great way for the younger generation and new investor to re-invest back into the stock market is through the (DRIP) Dividend Re-Investment Program. This is where once you receive the dividend funding in your portfolio, it is automatically allocated back into the stock at the current stock price.
A dividend is usually expressed in cents or dollars. To find the total dividend you would receive, you have to multiply the annual dividend by the number of shares you own. A dividend yield is shown as a percentage sign. To find the dividend yield, you divide the annual dividend by the stock price. You can find the total dividend allocated to your portfolio by taking the dividend yield and multiplying by the total investment within the security. The amount of each dividend varies between each security. Usually higher risk investments supply a larger dividend to compensate for the risk. While stable investments have a low dividend and stable share prices.
For long term investors, a dividend cut could be dramatic to their portfolio. Not only would they lose their annual dividend, but this would also cause shareholders to sell the stock due to an unstable future. It is simple: most securities stop paying dividends, because they are loosing revenue or because a large expense has arisen and the funding isn't there to allocate. The cutting of dividends from a stocks equals bad news.
When investing in stocks, make sure not only to check the background information and estimates of future data, but also to analyze the dividend the stock holds and the potential funding it could produce. If a company annually produces dividends and they have stable longterm growth, this shows the stability of the company and the income that they are producing.
Investors love stocks that pay dividends. This provides the investor with another source of income. Just remember the words of John D. Rockefeller: "The only thing that gives me pleasure is to see my dividend coming in."--John D. Rockefeller.
--Written by Max Levin for MainStreet
More from StockPick101.com.