Stake Academy - Dividends

Shareholders are owners of a company. It may seem obvious but the significance of such a position can be understated. As an owner you are entitled to company profits; a dividend.

A dividend is a fixed portion of profits paid per share to shareholders. It is quoted as a percentage (yield), relative to the share price.

Let’s use the fictitious company Maverick ($MVK) through our examples. A growing and profitable company producing cutting-edge technology to solve the world’s biggest existential problems.

Maverick is trading at $100 a share with $1 of dividends annually. The yield is 1%. Holding the stock for the year will entitle the owner to $1 in dividends per share.

Note that the most recent full-year dividend is used in the yield calculation. It’s a backward, not forward, looking metric. Companies constantly change their dividend based on their profitability and capital expenditure. It’s best to check a company’s dividend schedule which features its upcoming dividends.

How is a dividend paid?

Firstly, you must be holding the stock on the ex-dividend date. The ex-dividend date is usually 2 weeks before the dividend is paid and reduces the number of traders buying the stock and selling once the dividend has been paid. You must have bought before, not on, the ex-dividend date. This date is set by the stock exchange.

Once the payment date arrives, you will receive your dividend paid as USD cash into your Stake account. You can invest or withdraw those funds as you please.

Dividends are paid quarterly. As such, you will receive a quarter of the annual dividend (assuming a constant amount).

If you own 100 shares of Maverick paying a US$1 dividend per share annually, you are likely to receive US$25 in dividends. The most straightforward order type, a market order will fill at the best available price on the market.

Yield Chasing

Don’t be easily fooled by high-yielding stocks. A company with an unusually high dividend yield may look appealing, but remember that yield is a function of a stock price. It is possible that a high yield is matched by a decreasing stock price. Similarly, a decreasing yield may be unappealing but if matched by an increasing stock price it becomes a desirable problem to have!

Dividend Aristocrats

The Dividend Aristocrats are a group of stocks that have increased their dividend payout for 25 consecutive years. Many fit the definition of a blue-chip, bottom drawer stock. Names like AT&T and Bank of America are textbook examples. McDonald’s, 3M, Johnson & Johnson, and Coca-Cola all also hold a place in the upper class of dividend stocks.

As with most things, there’s an ETF for it! ProShares issued $NOBL, an ETF tracking all the dividend aristocrats.

Even during the pandemic, US companies were able to increase dividend payouts by 2.6% in total in 2020.

Tax on dividends

The US typically withholds 30% of your dividend amount for taxation purposes. With a W8-BEN form, automated by Stake for its customers, this figure is reduced to 15%.

DRIPs

Stake does not currently offer Dividend Reinvestment Plans (DRIPs) whereby dividends are automatically reinvested back into the stock. It is on our roadmap and we will work with our broker to give users access in the future.