Dividends explained

Yield, payout ratio, ex-dividend date, and dividend aristocrats.

TL;DR

A dividend is a cash payment a company makes to shareholders from its profits, typically quarterly. Dividends are how mature companies return capital that would otherwise sit on the balance sheet.

The metrics that matter

Three numbers tell you most of what you need to know about a dividend.

→Dividend yield = Annual dividend ÷ Share price (expressed as %)
→Payout ratio = Dividends ÷ Net earnings (sustainability check)
→Dividend growth rate = year-over-year increase in the dividend per share

Key dates

Dividends follow a specific calendar. Miss the ex-dividend date and you miss the next payment.

→Declaration date — the company announces the dividend
→Ex-dividend date — buy before this date to receive the dividend; the share price typically opens lower by the dividend amount on this day
→Record date — the date the company checks who owns shares
→Payment date — cash hits your brokerage account

Dividend Aristocrats

S&P 500 companies that have raised their dividend for 25+ consecutive years. The list signals long-term capital discipline. Examples: Coca-Cola, Procter & Gamble, Johnson & Johnson.

Worked example

Coca-Cola (KO) worked example

KO trades at $62 and pays $1.94 annually in dividends ($0.485 quarterly).

1Share price$62
2Annual dividend$1.94 per share
3Dividend yield$1.94 ÷ $62 = 3.13%
4EPS$2.55
5Payout ratio$1.94 ÷ $2.55 = 76%

Takeaway

A 3.13% yield is solid; a 76% payout ratio means most earnings go to dividends — limited room for further increases without earnings growth.

Common mistakes

What to avoid

!Chasing the highest yield — extreme yields often signal an imminent dividend cut
!Ignoring the payout ratio — companies paying out more than 100% of earnings are funding dividends with debt
!Forgetting that share prices drop on the ex-dividend date — the dividend isn't free money
!Overlooking dividend tax treatment — qualified dividends are taxed at long-term capital gains rates

Self-check

Test yourself

Q1Stock A trades at $50 and pays $2 annually. What's the yield?+

$2 ÷ $50 = 4%

Q2Why is a 95% payout ratio a yellow flag?+

Almost all earnings are going to dividends — there's no buffer for a bad year and no room for reinvestment.

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