QUESTION ABOUT STOCKS THAT PAY OUT DIVIDENDS?

When we buy the batch which pays out dividends, do regularly they compensate out the consistent % rate depending upon your investment? Or does it additionally rely upon profits? Meaning, your division is dynamic upon the volume of distinction the association creates as good as the volume of your investment? So if the association posts losses, afterwards we get no dividend? And if the worth of the batch decreases, does which meant your division payout will, as well? Is it probable which the dividends could cut your waste from the batch dropping value?

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{ 9 comments… read them below or add one }

Tom October 9, 2010 at 7:57 pm

Dividends are generally NOT based on stock price. They are usually based on profitability. For simplification, let’s say there are two categories of stocks: growth stocks and earnings stocks. With growth stocks, you hope to make money from an increase in the stock price when you finally sell it. This is called capital appreciation. With earnings stocks, you intend to make your money from dividends paid from company profits. These types of stock are normally managed differently by the companies that issued them. To further complicate things, some companies will issue both types.

rarguile October 9, 2010 at 8:00 pm

No, the amount of the dividend can vary – usually the Board of Directors will decide quarterly what the dividend per share should be. As a rule, they like to approve the same amount each quarter or to increase it from time to time. Ultimately the dividend does depend on the level of profits but it is quite possible for a company to pay a dividend in a quarter when it lost money. Many companies do not pay dividends but reinvest the profits in the business. The amount of profits distributed as dividends as a percentage of the total profits is known as the payout ratio. If one company has a payout ratio of 75% and another has a payout ratio of 25% then the second company can more easily afford to keep making dividend payments each quarter if profits fall.
Yes,a cut in the dividend will make value investors avoid the stock so the stock price may fall. However, a consistent record of paying dividends can prevent the stock price from faling faster because, as the stock price goes lower, the yield increases. Yield being the annual dividend divided by the current stock price.

STK TRDR October 9, 2010 at 8:16 pm

The dividend paid out is set by the company board. It is not directly linked to profits, but if the company is doing well they can choose to increase it, or decrease it if profits are lagging. But normally dividends are not effected by quarterly profits.

Normally a dividend paying stock will continue paying a set dividend barring a major financial crisis.

The % yield that you alway see stated, will change daily.
It is based on the yearly dividend paid divided by the closing stock price.

and yes, if you are a long time shareholder, over time the dividends that you receive can offset a drop in the share price.

Hope this helped :-)

William H October 9, 2010 at 9:14 pm

Dividends are paid normally on a quarterly basis. They are normally paid based upon projections by the company of how much money they have in the bank. If profits go down then, the company may decide to lower their dividend. If they lower the dividend, the stock price will probably go down because investors will sell.

If the value of the stock decreases, you payout will not decrease. It is normally set every year. Dividends pay you while you wait for the value of the stock to increase.

zanthus October 9, 2010 at 9:46 pm

NO. companies do not have to pay dividends.

Dividends are paid out of retained earnings, so if a company has no retained earnings, or weak earnings then the board of directors may decide NOT to pay dividends, because there might not be enough CASH on hand to pay dividends and also to run the company.

SO there always must be enough retained earnings, and cash before dividends are declared.

If you are buying a stock in order to obtain dividends, look at the company history. If they make every effort to pay out dividends, even in years when profits have been low, then there is a good chance that they may continue to do so in the future.

Look for “preferred” shares offering “culmulative” dividends. That way, if several years go by an no dividends are offfered,
and then in the next year dividends are declared, all the dividends owing to the preferred cumulative shareholders will be paid Before anything dividends get paid to the owners of the common stock.

Dividends are a nice bonus to stock ownership, but if the stock plummets in value, the dividends aren’t going to be of much help.

Andy October 9, 2010 at 10:19 pm

Since no other response mentioned this … the dividend is based on a share of stock; that is, so many cents per share. Since the share price fluctuates, the dividend yield will fluctuate. So you always have to look at the dividend amount … how many cents per share the company is paying … and how many shares of stock you own, to understand how much is heading for your pocket on the pay date.

Companies can of course cut the dividend rate but they are always reluctant to do so, since people bought the stock to get the dividend in the first place, many will sell it if the dividend is cut, and that of course will reduce the share price of the stock (and ironically, increase the yield on a relative basis).

Thin Kaboudit October 9, 2010 at 10:39 pm

Dividends are usually a fixed dollar amount, not a percentage. So the “yield” will go up when the price goes down, and vice versa. Companies that pay dividends very rarely put them down (It’s a bad message to send), but occassionally put them up.

If you rank the 30 Dow components by relative yield, then buy equal dollar amounts of the ten highest yielders, hold them 13 months (to avoid short-term gains taxes), sell them, and reinvest the money in whatever the “top ten” are then, and repeat this, you will make LOTS of money. It’s called the “Dogs of the Dow” strategy, and it has yielded an average annual return of better than 17% since 1973 (!)

You won’t hear much about it because buying 10 and selling 10 stocks once every thirteen months will NEVER make a broker rich!

Shabi L October 9, 2010 at 11:32 pm

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vani s October 10, 2010 at 12:02 am

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