Dividend Investing 101


  • Dividends account for a substantial portion of the market’s total return
  • A company’s dividend policy relays vital information about the health of its operations
  • There are several important dividend event dates to know about when managing a portfolio of stocks and funds

Dividend investing is a time-tested strategy to earn solid returns over the long-term. Owning blue-chip companies with reliable dividend payout rates has historically led to relatively strong risk-adjusted returns. For traders, dividends and dividend payment announcements are also known to be key influencers of share price volatility. It is an important corporate event category traders and investors alike should monitor.

Dividends are not just a quarterly influx of cash into your brokerage account. A company’s dividend policy often tells the market important information without words. For example, an unexpected dividend cut is an immediate red flag to the street that a company could be going through tough times. Or perhaps a growth firm that had never paid a cash dividend suddenly institutes a regular quarterly dividend—that’s often a signal that there are fewer growth opportunities and that the company has transitioned to being a value stock. There is so much to unpack, but clearly dividend investing has many important facets.

Market Returns Are Driven by Dividends

At a high level, dividends on the S&P 500 have grown by an average of 5.7% per year since 1957—that's more than 2% above the inflation rate over that period, according to WisdomTree.¹ Moreover, using data going back to 1978, dividends and reinvested dividends have contributed a whopping 69% of the U.S. stock market’s total return.

While most U.S. large-cap companies pay dividends, only about a third of small-cap firms pay out a regular distribution to shareholders. Go overseas, however, and you will find bigger dividend rates. Data from J.P. Morgan Asset Management show that yields in foreign markets are historically high. European markets boast a dividend rate of 3.2% while developed Asia yields 3.9%.

The Need-To-Knows of Dividend Investing

It is obvious that dividends are a key driver of long-term total returns for global stocks. It’s also critical that investors know how dividends work and when companies they own will distribute cash (or shares) to their equity holders. Let’s go through some common questions investors have about dividends.

1. What are dividends?

Dividends are distributions from a company to its shareholders. A firm’s Board of Directors declares how much the payment will be, and it is often paid out quarterly. A dividend is often paid in cash, but it can also come in the form of shares (known as a stock dividend). Investors commonly assess the amount of an investment’s dividend by way of a percentage yield. Simply divide the last 12 months' total dividends by the share price to arrive at the current yield. Still, the future is unknown, and dividend increases or decreases often happen.

Wall Street Horizon finds that if a company’s dividend policy is not consistent, investors respond unpredictably, resulting in abnormal returns. Hence, changes in a firm’s dividend policy are critical to watch out for. Dividend suspensions, resumptions, increases, decreases, or even the issuance of special dividends are key stock events we monitor for clients.

2. How are dividends taxed?

Taxes are always top of mind among investors. Individuals in a high tax bracket often seek dividend-paying companies since there is often preferential tax treatment for dividend income—some countries even allow dividends to be tax-free.² For U.S. taxpayers, the IRS classifies dividends as either qualified or non-qualified depending on a few factors. Qualified dividends are taxed at the same rates as capital gains (which are lower than ordinary income tax rates). Non-qualified dividends are taxed at an individual’s regular marginal income tax rate.

Dividends are notoriously “taxed twice” since the company pays tax on its earnings (from which dividends are paid). Shareholders then owe tax when they receive the dividend. For this reason, some investors (and companies) prefer share buybacks instead of dividends when returning capital to equity holders.

3. How do dividends work?

Dividends work by distributing cash or shares to an equity holder. With its profits, a company can retain earnings, re-invest in the business, or engage in shareholder accretive activities like repurchasing stock or paying dividends. A firm must first declare a dividend before making the payment. Once received, the investor can either keep the dividend as cash or, as is commonly done, reinvest to buy more shares of stock (known as a dividend reinvestment plan, or DRIP).

4. What stocks pay dividends?

There are a variety of characteristics of dividend-paying firms (dividend stocks). Often, mature and stable businesses choose to pay dividends while growth-oriented enterprises use all cash flow to reinvest in high-return projects. Also, as hinted at earlier, large-cap stocks are more likely to pay regular dividends compared to smaller firms. Finally, non-U.S. companies generally have higher payout rates compared to those in the U.S.

5. How often are dividends paid?

Dividends are usually paid in quarterly or semiannual installments. But that is not a hard and fast rule. Some firms have a dividend policy that’s based on a certain level of profits—if a business has a year of strong earnings, then they might decide to issue a bigger dividend. An investor’s dividend might also come in the form of shares. There are even two other dividend types, property and liquidating dividends, that are non-recurring. Dividends on bond funds come each month. So, dividend frequency can certainly vary depending on what you own. Knowing all the dividend dates is helpful for investors seeking a particular periodic cash flow.

6. When are dividends paid?

While fixed-income funds often distribute dividends close to the first business day of the month, a single company’s dividend can hit at any time. Boards of Directors try to keep to a routine of distributing dividends around the same date each quarter. For example, if company X has a quarterly dividend of $1 per share, the Board might stick to a schedule of paying it out on the 15th of each January, April, July, and October.

Four key dividend events happen in sequence: the declaration (or announcement), the ex-date, the record date, and the pay date. You can see Procter & Gamble’s dividend payment history in the image below for a full-year look at all dividend events.

The Dividend Timeline of Events

Source: Wall Street Horizon

Dividend Announce Data – The date on which a company’s Board of Directors announces the dividend

Dividend Ex-Date – The first trading day on which the shares trade without the dividend. It’s also when new buyers of the stock will not be owed the dividend.

Dividend Record Date – The date on which a company marks down all shareholders who are owed the dividend. The ex-date is always one business day before the record date.

Dividend Pay Date – The date all investors look forward to; when the company distributes the dividend to its equity holders. This date could be up to several weeks after the record date.

Procter & Gamble (PG) Dividend Event History

Source: Wall Street Horizon

The Bottom Line

Dividends play a significant role in long-term stock market returns. A company’s distribution policy tells the market valuable information about the health of its business. Investors seeking strong dividend-paying stocks should research a firm’s payment history and must continuously monitor dividend events to effectively manage a portfolio’s risk.