Stocks · Beginner · 5 min

Dividends: how, when, why

You can explain the dividend dates, why the share price drops on the ex-dividend date, and how to calculate a dividend yield.

Not free money

Few things feel as good to a beginner as the first dividend: cash in the account, just for holding a share. It can look like free money on top of any price gains.

It is not free. A dividend is money that leaves the company and goes to its owners, so the company is worth less afterwards, and the share price shows it. Understanding the mechanics helps you use dividends sensibly and avoid one of the oldest beginner traps.

The dividend calendar

A dividend is a payment a company makes to its shareholders, usually from its profits. Many large companies pay once a year, others every quarter. The board, and in many countries the shareholder meeting, decides how much.

Four dates matter:

Declaration: the company announces the dividend, the amount and the other dates.
Ex-dividend date: from this day on, the share trades without the right to the next dividend.
Record date: the company checks who is registered as a shareholder.
Payment date: the money arrives.

For buyers, the ex-dividend date is the one that counts. Investor.gov puts it plainly: if you buy on or after the ex-dividend date, you will not receive the next dividend. In the US, since settlement moved to one business day, the ex-dividend date is usually the record date itself.

On the ex-dividend date, the share price typically drops by roughly the amount of the dividend. That is logical: the cash is leaving the company, and buyers from that day on will not receive it.

To compare dividends, investors use the dividend yield: the yearly dividend divided by the share price. A yield of 3% means 3 in dividends for every 100 invested, at today's price. Dividends are not fixed: companies can raise, cut or cancel them.

Price −2, cash +2

A fictional share closes at 50.30 the day before its ex-dividend date. The dividend is 2.00.

On the ex-dividend date it opens at 48.30, about 2 lower.
A shareholder with 100 shares now holds shares worth 200 less and is owed 200 in dividends.
After the payment, taxes on the dividend may reduce the cash.

The total is about the same as before. The dividend has moved value from the share into the shareholder's account, not created it. Over the following weeks, the price may recover the drop, or not. That depends on how the business develops, not on the dividend itself.

Common mistakes

Buying just to catch the dividend. The price drop and taxes usually cancel the gain.
Chasing the highest yield. A very high yield often means the price has fallen because investors expect a cut.
Buying on the ex-dividend date and expecting the payment. You need to own the share before that day.
Treating dividends as fixed. They can be cut when profits fall.
Ignoring withholding tax. Foreign dividends often arrive with a part already withheld, as covered in the rubric on accounts.

The takeaway

A dividend is a share of profits paid to owners. Buy before the ex-dividend date to receive it, and expect the price to drop by about that amount.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the candle of the ex-dividend date.

Tap the chart.

On the ex-dividend date the share trades without the dividend, so it usually opens lower by about the dividend amount.
2You buy a share on its ex-dividend date. Do you receive the next dividend?

Investor.gov: if you buy on or after the ex-dividend date, you will not receive the next dividend. The seller gets it.
3A share costs 80 and pays dividends of 2.40 a year. What is the dividend yield?

Dividend yield = yearly dividend ÷ share price: 2.40 ÷ 80 = 0.03, or 3%.
4A company cuts its dividend after a bad year. Is that allowed?

Ordinary dividends are not a contract. Companies can raise, cut or stop them.

of 4 correct.