Earnings from the stock market through cash dividends is one of the two ways of earning passive income. We already have discussed how to earn from price appreciation in the market, if you have not read it yet refer to our previous article how to make money in stocks by price appreciation.
The photo below is an example of a cash dividend I received from a company called Semirara Mining Corporation (Stock code SCC). My brokerage company for this is COL financial and it gives me an update when I have earned a dividend from a company that I have put an investment with. Before we discuss the basic details of what is a cash dividend, lets discuss first what do we mean when we earn from a cash dividend from a company listed in the stock market
What are Dividends
Dividends are incentives being given by a company to stock holders of the shares of a certain company.
Before a company can give dividends to share holders it goes through approval process by its board director members. Deliberations are being conducted if the company has the capability to give cash (cash dividends ). This depends on the earnings of the company. It can only give dividends when they have spare cash.
So in technical terms, this is how the company distribute the earnings to existing shareholders. This is also a way for them to give appreciation for those who are supporting or giving investments to the company. People who buy the shares will be motivated to hold on the shares instead of cashing out as there is an incentive to it.
Companies distribute dividends every quarter, but for the Philippine settings this is not a hard rule, others can give twice a year or once a year as it depends on the market condition and company financial situation.
Two Types of Dividends
Dividends are classified in two types, cash dividends or stock dividends.
Cash Dividends is a type of dividends wherein the company gives cash on a specified date. We can receive this dividend electronically in our broker accounts during the payment period. The picture I have shown below is an example.
For the case below, company is giving 1.0 peso/share. Since I bought 6,000 shares form SCC (Semirara Mining Company,) I will be entitled to 1.0 x 6,000 shares or Php 6,000 pesos. There is a 10% withholding tax so there is a deduction of 600 pesos. Total amount that went to my account is Net amount 5,400 pesos. Nice!
Stock Dividends are type of dividends being given in the same manner as cash dividends but instead of giving out money the company will give a number of shares coming from the stock reserves of the company. Usually this is in terms of percentage of your existing number of shares. For example, a company declares a 10% stock dividends, you will then receive 10% of the number of shares that you have during the payment date. If you have 1000 shares then you will be entitled to 100 shares.
Note also that for this 2 types it applies to the common dividends being given regularly by the company. Sometimes when the company wants to give more dividends, they call this as special dividends. Its basically the same, just another incentive for you.
Important Dates and Considerations on Dividends
In order to receive Cash dividends (or stock Dividends), there are important dates and considerations you should take note. Simply buying a stock may not entitle you to the dividends.
There are several dates normally announce when a dividends is going to be given, these are;
Ex-date refers to the date when you should be holding the stocks to be included on dividend payouts. Take note this is the most important date. You should be holding shares of the stocks before this date and hold into it until this date. Once Ex date is arrived, if you buy shares on this date and after this date, you will no longer be entitled for the cash (or stock) dividends. This is where most new investors missed out so you better remember this.
Record date is the date used by companies to account or register those who will be entitled. This is for the company purpose of recording so we should not worry about this date. Normally in disclosures, record and payment date is mentioned, so just count 3 working days before the record date and that will be your ex-date
Payment date is the date when the companies are obliged to pay us out with the dividends. Email will be receive from our brokers when they received the dividends from the companies. Reminder also that sometimes because of some technical or documentation issues there are times that payment date is deferred. If you did not receive dividends on the payment date, be sure to contact your broker firm for updates.
Dates for each stock can be located on PSE Edge disclosures, the attach link can be accessed.
Remember that when a company give its investing shareholders cash or stock dividends, this will come from the company earnings or shares so there is an impact to the stock price. They inversely correlated so when a company gives out a 10% dividends, expect the price to correct by the same amount. Don’t worry on this as the market is just pricing in the effect on income or handing out of company earnings. Price will recover if the stock has great expectations in the future.