Prior to the payout of a dividend, a company will announce or "declare" the payment of the dividend. This will include the amount of the dividend, the date of the payout, and the date that will be used to determine the owner of shares and therefore who gets the dividend payment. Prior to declaring the dividend, investors will rely on the best available information to make educated guesses about the expected dividend.
Significance of the Declared Date of Dividends
Though U.S. companies almost always seek to maintain or increase the amount of dividends, there is no obligation to maintain or increase the dividends. It is only after declaring the payment of the dividend that the company is committed to making the dividend payment to common shareholders.
Dividends as Income
Generally speaking, income from investments in stocks comes from two sources: increases in the market price of the stock and dividend payouts. For companies that are in more established industries, the importance of the dividend is often higher than for new industries. For example, the dividend on regulated utilities (a long established and stable industry) tend to be high, but the dividends on high tech stocks are often low or even zero.
Frequency of Dividends
In the United States, most stocks pay dividends on a quarterly basis. However, in other parts of the world, dividends can be paid on very different schedules. For example, some stocks in European companies pay dividends annually. Also, U.S. companies tend to keep dividend payments more stable over time than foreign companies. Consequently, a dividend could be a one-time payment or could vary considerably from period to period. For investors who are seeking to use dividends as part of their income stream, it is very important to determine the volatility of the dividend payments.
Risks in Dividends
Stocks with exceptionally high dividend yields should be viewed skeptically. Often, a stock with a high yield has had a significant decline in stock price, but the dividend has not yet been cut. For a stock to have a significant decline in market price, there almost always are fundamental reasons for large scale drops in price. These fundamentals can and often do make it impossible to maintain dividends at high levels. Considerable homework should be done before investing in these stocks.
Determining the Dividend Yield
The yield on a common stock is the annual payment of dividends per share divided by the market price of a share. Simply comparing the dividend per share of one stock to another can be misleading because it ignores the number of shares that one can buy with a fixed amount of initial investment. By using the yield of the stocks, they are put into similar terms for comparison.