How Do Dividends Work?

If you’re asking yourself “how do dividends work?” then you’re in the right spot and you’re also on the right path! Maybe you just want a little more information or maybe you’re just starting to learn about dividend investing.

What is a dividend?

A dividend is a cash distribution by a company to its shareholders. Each company makes a decision between the trade-off of reinvesting money back into the business or paying out a dividend. When companies are focused on growth, they will likely reinvest profits into the business to capture more market share. Once the market is quite saturated, the company may decide to start paying out part of their profits to shareholders in the form of a dividend.

Income Funds will generally own a basket of income paying investments including dividend stocks and fixed income. You can also find some Income Funds that use sophisticated trading methods such as writing covered calls or put options to generate higher levels of income.

How do dividends work?

Once you purchase shares of a dividend stock or a dividend fund, you become a shareholder entitled to the declared dividend distributions. Dividends will be paid at the frequency declared by the investment you purchase. Most stocks pay quarterly. Some stocks pay monthly. You can find income funds that pay monthly dividends as well.

You earn a dividend on each share you own… the more shares you have, the more dividends you earn. In simple terms, that’s how dividends work. Hold onto your shares for the long-term and keep collecting dividends.

Dividends get deposited directly into your investment account in the form of cash. You can choose to automatically re-invest dividends if you sign up for such a plan.

Dividend dates you need to know about…

There are 3 dates shareholders should know about when it comes to dividend investing:

  1. Ex-distribution (Ex-dividend) Date = Record date − 2 trading days*. The investment (such as a stock) falls by the declared dividend amount on this day.
  2. Record Date – Shareholders on record by the close of market trading on this day are entitled to receive the dividend.
  3. Payment Date – Shareholders on record will receive the declared dividend on this day.

The reason a stock price is adjusted downwards on the “Ex-dividend Date” is because the dividends paid out don’t belong to the company anymore. This is usually not observed on stocks that have high volumes of shares being traded.

Note*: “trading day” is defined as a business day when the market exchanges and banks are open.

When do you need to buy shares to get the dividend?

You need to know the “must own date”.

Equity trades settle 3 days after the trade date… Settlement Date = Trade Date + 3 trading days*. This means that the ex-dividend date is not very useful for shareholders since it is only 2 trading days before the “Record Date”.

We will now add the “must own date” to our existing list of dividend dates:

  1. Must own Date = Record date − 3 days trading days*. You must place your trade on or before this trading day so that your trade can settle on the “Record Date”.
  2. Ex-distribution (Ex-dividend) Date = Record date − 2 trading days*.
  3. Record Date – Shareholders on record by the close of market trading on this day are entitled to receive the dividend.
  4. Payment Date – Shareholders on record will receive the declared dividend on this day.

Note*: “trading day” is defined as a business day when the market exchanges and banks are open.

Example of how dividends work…

On Sept 10, 2014 Canoe EIT Income Fund announced the Sept 2014 dividend distribution.

How do dividends work

Dividend amount = $0.10 / unit

  1. Must own Date = Sept 22 − 3 trading days = Sept 17, 2014 (Buy your shares on or before this trading day)
  2. Ex-dividend Date = Sept 22 – 2 trading days = Sept 18, 2014
  3. Record Date = Sept 22, 2014
  4. Payment Date = Oct 15, 2014

How do dividends work

Buy your shares on or before Sept 17, 2014:

How do dividends work

Trade Date = Sept 17, 2014
Settlement Date = Sept 22, 2014 (on the Record Date)

We are entitled for the September 2014 distribution on Oct 15, 2014:

How do dividends work

Dividend amount = 1,800 shares * ($0.10 / unit) = $ 180

 

So… how do dividends work? Buy your shares on or before the “must own date” and receive your dividend payments!

Dividends provide your investment portfolio with increased stability and also supply you with a steady stream of income… a winning strategy!