Dividends: what they are, when they are paid and how much they yield

A dividend is the part of its profits that a company decides to share with its shareholders. If you own 10 shares of a company that pays $1 per share, you receive $10 (minus taxes) in your account.

Why some companies pay and others do not

A company that makes money can do three things with it: reinvest it to grow, buy back its own shares or pay it out as a dividend.

• Mature, stable companies (beverages, banks, energy, consumer goods) often pay dividends because they no longer have as many opportunities to grow fast.
• Growth companies (technology, biotech, young companies) rarely pay: they prefer to use every dollar to grow, and shareholders expect to profit from a rising price.

Neither is better on its own. What matters is that the business uses its money well. See how to analyze a company.

The dates that matter

1. Declaration date: the company announces how much it will pay and when.
2. Ex-dividend date: if you buy the stock on this day or later, you do not get that dividend. To receive it you must own it before.
3. Record date: the company checks who its shareholders are.
4. Payment date: the money reaches your account, usually days or weeks later.

On the ex-dividend date the price usually drops by roughly the dividend amount, because that money has «left» the company. That is why buying just before to collect the dividend is not free money.

Dividend yield

It is a full year of dividends divided by the stock price:

If a stock costs $50 and pays $0.50 each quarter ($2 a year), its yield is 2 / 50 = 4 % a year.

A very high yield is not always a good sign: sometimes it is high because the price fell a lot and the market expects the dividend to be cut.

Reinvesting dividends

If instead of spending dividends you buy more shares, those new shares also produce dividends. That is compound interest at work. In many indexes, a significant part of long-term returns comes from reinvested dividends.

Taxes on dividends

Dividends from foreign companies usually arrive with tax already withheld in their home country and must also be considered in your Mexican tax situation. The exact withholding depends on the tax treaty, the brokerage and your documents. Your brokerage gives you a yearly statement with the amounts; review it with an accountant. More in taxes on US stocks from Mexico.

What matters to get started

• A dividend is a share of profits that the company pays out.
• To receive it you must own the stock before the ex-dividend date.
• Dividend yield = yearly dividend ÷ price.
• Reinvesting them speeds up long-term growth.