Dividend Stocks Explained: Yield, Payout Ratio and Key Dates
Dividends turn stocks into a source of income. Here is how dividends are paid, the four dates that decide who gets them, and the numbers that show whether a dividend is safe.
Key takeaways
- A dividend is a cash payment a company makes to shareholders, usually every quarter in the US.
- To receive it, you must own the shares before the ex-dividend date.
- The payout ratio shows how much of profits goes to dividends. Very high ratios can signal risk.
- Qualified dividends are taxed at lower rates than ordinary income in the US.
The four key dates
| Date | What it means |
|---|---|
| Declaration date | The board announces the dividend amount and dates. |
| Ex-dividend date | Buy before this date to get the dividend. Buy on or after it and the seller gets it. |
| Record date | The company checks who its shareholders are. With one-day settlement, it is usually the same day as the ex-date. |
| Payment date | The cash arrives in your brokerage account. |
On the ex-dividend date, the share price usually drops by roughly the dividend amount, so buying just before it is not free money.
Numbers to check
Dividend yield
Yearly dividends per share divided by the share price. A $2 dividend on a $50 stock is a 4% yield. A yield far above similar companies can mean the price fell because investors expect a cut.
Payout ratio
Dividends divided by earnings. A company paying out 40% of its profits has room to keep paying in a bad year. One paying more than 100% is paying out more than it earns, which cannot last forever. For companies with large non-cash charges, such as real estate trusts, analysts use cash flow measures instead.
Dividend growth
A history of steady increases often reflects a stable business. Companies in the S&P 500 that have raised their dividend for at least 25 consecutive years are known as "Dividend Aristocrats."
Taxes in the US
Qualified dividends, from most US companies held for more than 60 days around the ex-date, are taxed at long-term capital gains rates. Ordinary dividends are taxed as regular income. Dividends inside an IRA or 401(k) are not taxed until withdrawal, and not at all in a Roth if the rules are met. See Roth vs. Traditional IRA.
Reinvesting dividends
A dividend reinvestment plan (DRIP) uses each payment to buy more shares automatically. Over many years, reinvested dividends have made up a large part of the stock market's total return. Model it with our dividend calculator.
Dividends are never guaranteed. Companies can cut or suspend them at any time.
This article is general education, not personalized financial advice. Read our editorial policy and disclaimer.
