A guide to stock dividends for the new investor
Oran Hall, Personal Financial Advisor
QUESTION: I am looking to be a shareholder soon and I have some questions and queries I need to clear up. I have an understanding that one has to take the money into the broker physically to buy the stocks. Now, after the dividend is paid, do I need to take more money to buy more stocks for the next quarter? Or is the money taken out of the dividend to buy more stocks? Can the dividend be taken out at anytime for my personal use?
FINANCIAL ADVISER: To buy stocks, it is usually necessary to take the money to the broker. Payment is usually in the form of a cheque, but arrangements can be made to lodge the funds to the broker's account, which would mean getting the details of the broker's account from the broker.
Some brokers will accept cash if the sum is not large. Security is a primary consideration.
Dividends are payments from the profits of a company to its shareholders. They are recommended by the directors, but it is the shareholders who ultimately vote for the dividends to be paid, that is, they approve the payment of the dividends.
Although many companies tend to pay an annual dividend, there are others that pay more frequently - twice per year or even four times per year. Dividends are paid to shareholders on the shareholders' register of the company on what is called the record date.
There is a designated period during which the stock trades ex-dividend, that is, investors who buy stock during that time are not entitled to a dividend. That period commences four business days before the record date and extends to the payment date.
Dividends are declared per unit of stock and are paid on the amount of stock that each shareholder owns at the record date. If, for example, the dividend on stock 'NBP Limited' was 50 cents per stock unit and shareholder Jack Robin owned 10,000 units of the stock, his dividend would be $5,000.
As an investor, you are free to buy stock whenever you wish. You need not wait until a dividend is likely to be paid to buy stock. In any event, stock prices often increase just before a dividend is paid, giving no advantage to the new shareholder, while not putting the seller at a disadvantage.
There are cases in which arrangements may be made to reinvest dividends. In such cases, the shareholder may sign a mandate authorising a broker to use the dividends to buy additional shares in the company that paid the dividends.
Bear in mind that the dividends belong to you, the shareholder, and you are free to use the funds as you please. The funds are paid by cheque by general practice, so you may lodge your dividend cheque to your account, invest the funds, or spend them.
Dividend rates tend not to be high, one reason being that many companies opt to retain profits in the company. This serves to lessen the need for the company to borrow, and this may strengthen the financial position of the company thus enhancing its position to be more profitable in the future. This, in turn, raises the prospects for the price of the stock to increase at a faster rate, so the investor really postpones an immediate benefit for a longer term benefit.
Apart from the cash benefit in the form of the dividend, then, listed companies offer investors another type of return on their stock investments - capital appreciation. This is often much more than the dividend, but it is less certain. In fact, the anticipated capital gain may not materialise as stock prices may decline.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. firstname.lastname@example.org