Dividends simply put, are profits given in the form of cash to the investor. Dividends are declared by the company in the form of dollars and cents regardless for the most part of the actual price of the stock. Example: If a stock yield is 10% then a $10 stock will pay $1 in dividends. Now here’s the important thing to remember! If the price of the stock goes up or down, the stock will still pay $1. If the stock price drops by a couple dollars and the company still declares the same dividend you still get $1.
When we talk of dividends we usually talk about yield. Yield = dividend/stock price. This is expressed in percent. Falling stock prices raise yield and rising prices decreases yield.
Usually a broad based hit to the market will drop the price of the stock without affecting the fundamentals. As such a drop in price will leave the payout of the dividend alone. Thus, a falling stock price will produce a higher yield.
Look at the EPS, or Earnings Per Share. How much of the earnings does the dividend represent. In some cases you’ll see quarters reported where earnings are less than the dividend. That can be a danger signal if the situation is long term. One time charges for loan repayment, stock buybacks, etc. usually are not significantly detrimental to dividends by themselves. Always keep an eye on news and fundamentals though to make sure there aren’t other factors coming into play.
Eligibility for a dividend requires you to own the stock on the date of record. It takes 3 business days for a stock purchase to clear. So counting backwards you must own the stock 3 business days prior to the date of record. On the day after that date, which we call the Ex-Date, stock purchasers will not be eligible for this payout. On Ex-Date the stock will be reduced in value automatically by the exchange by a rate equal to the dividend payout.
So, is it better to buy before or after ex-date. That’s a matter of debate. Some argue it’s better to buy before ex-date. They make the point that with higher yielding equities such as Mreits institutions buy up the stock after ex-date and drive the price up, making it tough to catch it at the bottom. Others argue you can get a better deal after ex-date because the short sellers go back on and drive the price down. Look at the previous ex-dates and see if there’s a pattern. It may give you an idea of which path to take.
And that’s all for now about Dividends.
In May 2010 I discovered the advantages of the ROTH. The big advantage is that profits are tax free. The disadvantage is that losses can’t be written off. Hmmm. I’ll just have to make sure I don’t lose money in the market in my ROTH account. Can that be done? In a word, mostly.
I already had a brokerage account and I didn’t want to close that. So I opened the ROTH, signed the papers at the Scottrade office and put $500 in. Then the flash crash happened in early May 2010. And I figured the market would get spooked. I sold my Apple stock for a nice profit (26 shares) and took the proceeds and moved the money into the ROTH. And then I bought the stock back along with some Sandisk and Anadarko (which came in big for me) in the ROTH.
I have countless transactions in both my Roth and the brokerage account. But I’m a little more selective now. The ROTH is a retirement supplement for me. I put high yielding dividend stocks into that account. Dividends pay cash without having to sell the investment. Growth stocks that pay little or no dividend require the investor to cash out, removing any chance of future profit from the equity. So you’ll see me push dividend stocks for that reason. And they fit perfectly into a Roth for tax purposes.
Well, I started investing in June 2009. But truthfully I didn’t make the decision then. I made that decision almost two years prior. Why did I wait? I needed to pay down a significant credit card debt. I knew in early 2008 that I’d soon be paying off my car loan and I also had been quite liberal spending money I didn’t have over the past few years on my other hobby, astronomy. I’m almost embarrassed to admit my debt exceeded $17k. But I knew I could get that down if I could get a lower rate. With all the credit card offers coming to my mailbox I bit on one that the terms were acceptable, part of the Union offerings actually.
So with a new lower interest loan I started paying down my debt, throwing every bit of spare cash into the endeavor. When the car was paid off I added the cash normally going to the car payment to my credit card payment until I hit zero in early 2009.
And that’s lesson one! Don’t invest unless your high interest debt is all gone! Nothing pays as much in returns as debt reduction.
So, in June 2009 it was time. I had $2000 to throw into a brokerage account. I went over to Scottrade on Fruitville Pike, talked a bit and also IM’ed with Frank extensively. So, using what I considered common sense I bought COP (Connoco Phillips) and BAC (Bank of America). I bought them on Friday and the Monday after the market tanked 300 points. Great! As time went on I made a few other purchases and got impatient enough that I sold them on panic for a loss. Impatience for progress hurt me. Didn’t lose horribly but it was well paid schooling. Finally made some money on Dominion Energy (D) and a little known company called Apple. And I bought Microsoft So by the end of the year I had lost $300. And that’s the last losing year I’ve had.
I’ve been investing since June 2009. I am not a professional investor and most of my knowledge comes from my experiences since that time. By profession I am an IT technician at a local university in Central Pa. I also am an avid astrophotographer. Neither of these have anything to do with finance or investing of course.
More to the point, besides my experiences (some of which were a bit painful at first) I have read a number of investment books and I’ll mention them shortly. I have read some of the Jim Cramer books which are good for general advice as well as the basic strategies of investing. He hammers home the homework element which all investors should do. In addition I’ve read Toni Turner’s Beginner’s Guide to Short Term Investing and William O’Neil’s How to Make Money in Stocks. That and 4 years of experience is what I have so caveat emptor if you will.
I’m going to stop here with intros and simply finish with the general warning that should you find my suggestions and posts interesting enough to try some of my techniques and copy my methods, you do so at your own risk. The money you invest and move through the markets is your responsibility. Sometimes the best strategies go wrong. Even when all is done to perfection something, a natural disaster like Katrina or Fukishima, some hidden scandal like Madoff or Enron, or some political wrangling that comes out of Washington, Europe, or China causes a correction. Consider me one of a million sources and take what I say with a large grain of salt. Thanks.