Dividend is a payment of the profit, or a part thereof, to the holder of a share. The amount of this profit payment is often in proportion to the amount of profit made. A company can pay out this profit in different ways: via cash dividend, stock dividend or optional dividend.

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When will you be paid a dividend?

Calculating a dividend is fun. You can set a clear goal for yourself. In addition, it is important to create a perspective for yourself. It is very important to be conscious with your investments. Calculating the dividend results in a position for yourself where you can determine at all times if the invested effort and money is worth the return.

However, not everyone who buys a dividend stock will receive a dividend right away. To find out if you are entitled to dividends, you need to know some terms. Think for instance about ex-dividend or the record date. You can read more about this and other subjects here.

Interim dividend

Believe it or not, but in the world of investment there are also interim dividends. Interim dividend is an important concept when calculating the dividend and determining when you will receive it. Interim dividend is an advance on the dividend you are entitled to.

This does not mean that you will get an extra dividend. Advance payments do exist, but you will never get something for free. If you get an interim dividend, it will be paid before the end of the financial year, for instance. But why do companies pay interim dividends?

A taste for it

If you have a taste for investing, you can start with a portion of your assets. Choose the right broker before you start investing. Not every broker is suitable for every type of investor. A beginner wants a clear programme and someone who invests on a short term does not want to pay too much for buying and selling shares. There are many different brokers, so do your research and compare them before making your choice.

If you really start investing, it is important to switch off your emotions. Many beginners invest with their feelings, while investing is an activity where you have to switch off your emotions. You should not get upset if a stock does not perform as you expected. Stick to a clear strategy. Be prepared to take a loss and to get rid of a stock at a loss if necessary. There is no investor who only achieves success.

Cash and stock dividend

Companies can pay out dividends in different ways. When calculating the dividend, it is important to know this. Companies can pay dividends in the form of shares and cash. This is done for different reasons.

The reinvestment of dividends in companies is an important aspect to take into account. When cash dividends are paid out, for example, you may have to pay more tax on your reinvestments. This varies and depends on many things. Calculating the dividend can show very nice results, but it is important to consider all aspects.

Dividend tax, to be included in the dividend calculation?

When calculating the dividend, it is important to take everything into account, including the costs. This means you also have to consider dividend tax. Logically, this will also reduce your dividend yield. Reinvesting your dividend can be very lucrative. This can lead to the interest on compounding effect. Albert Einstein called this the 8th wonder of the world.

You may wonder what this has to do with dividend tax. When a dividend is paid out and you want to reinvest it manually, you will incur costs. Transaction costs, for instance, can mount up. Dividend tax can also be around the corner. Therefore, take a good look at each country, broker and your own situation to see whether you also have to pay dividend tax. With automatic reinvestment, for instance, you will usually not incur these costs.

High dividend and growth dividend stocks

High-dividend stocks provide a nice income for the investor. These stocks have become even more attractive due to the upcoming abolition of dividend tax. Investors can use the high dividend they receive to live off or invest in new shares. With this second option, the investor can generate even higher dividend income. The disadvantage of high-dividend stocks is that there is usually little money left over for the company to invest in development and growth. This creates the chance of lower results in the future and therefore a lower dividend payment.

Growth dividend shares have a lower dividend payment, but often leave more money to invest in the company. This can ensure that profits rise and the dividend pay out will increase in the future. Another reason why growth dividend stocks usually pay lower dividends is that the market very much appreciates the growth potential of these companies, which also causes the price to be higher.

(Check my article How Does Dividend Investing Work In Practice?)

Dividend yield, dividend calculation

To determine whether a company pays a good dividend, you can calculate the dividend yield. This indicates the return an investor gets on his shares. The dividend yield is calculated as follows:

(dividend per share / market value per share) x 100%.

This calculation only gives an indication of the yield. The yield is also dependent on the market price at the time, which can fluctuate considerably from day to day.

A high dividend yield is especially interesting for shares that have a relatively small fluctuation and for which a steep rise is not necessary. The dividend is then a stable return on the share. Another way to find out if the dividend payment is high is to calculate the pay-out ratio. This indicates how large the part is that is paid out in dividends compared to the net profit. This pay-out ratio is calculated as follows:

(dividend / net profit after tax) x 100%.

A high ratio indicates that a large part of the net profit is paid out to the shareholders. This often (indirectly) indicates that the company is financially stable and can therefore pay out a large proportion of the profit in the form of dividends.

Calculating the dividend

The net dividend per share can also be calculated. Company XYZ has a share capital of USD 2,000,000, of which USD 1,500,000 has been placed.

Suppose the profit after tax of a company is USD 500,000 and the nominal value of a share is USD 15. Then first, the dividend tax of 15% must be deducted. The profit amount remaining is USD 500,000 x 0.85 = USD 425,000. The number of shares issued is USD 1,500,000/€15 = 100,000 shares. Net dividend payment USD 425,000/100,000 shares = USD 4.25 net dividend per share.

Best dividend stocks

A stock with the highest dividend is not necessarily the best stock. Dividend stocks with a growing dividend are increasingly being bought. These stocks provide an immediate return and create an expectation that shareholders can receive more dividends in the future.

Companies that are growing fast tend to invest more in growth. These companies often pay little or no dividend. Partly because of this, high dividend paying companies often come from a stable sector such as banks, real estate, oil and telecom companies. Companies in the technology sector often pay little dividend, because they often invest their money in innovation and growth.

About Alexander Kelm

Alexander Kelm is a passionate value investor and runs the website Wall St. Nerd. Here, the passionate value investor writes in-depth articles on the topic of Value Investing. Value Investing involves analyzing a company's fundamentals and can be characterized by an intense focus on a stock's price, its intrinsic value and the relationship between the two.

Alexander Kelm offers online courses on stock investing.

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