The Mechanics of Dividends

Dividends: Ultimate passive income
Dividends: The Ultimate Passive Income

As I’ve previously written, dividends are the cornerstone of my investing philosophy.

As part owner of a company, it is only right that you should share in the profits. Dividends are the means by which owners are paid. Personally, I have found receiving money on a regular basis for no work addictive. Here is a breakdown of how dividends work in practice.

Dividend frequency

Companies that issue dividends typically do so annually, quarterly, or monthly, with the latter two options being by far the most common.  I don’t have any numbers to back this up, but it seems to me that over the last decade or so, there has been a trend towards monthly payments.  Whether that’s the actual case or not, you should be aware of when your payments will be delivered.  Personally, I prefer monthly payments, as it evens out my cash flow, and will provide me with regular monthly income upon retirement.  (…many, many years from now.)

Even if you invest in companies that pay quarterly, it is possible to develop a portfolio that pays you roughly the same amount of money each month, although a bit more care is needed in building your portfolio.  Companies that pay quarterly will be in one of three possible dividend cycles.  This is probably best explained with an example:

Bank of Nova Scotia (BNS) pays its dividends in January, April, July, and October.
Bank of Montreal (BMO) pays its dividends in February, May, August, and November.
Fortis (FTS) pays its dividends in March, June, September, and December.

It takes a bit of care in planning, but by paying attention to when the companies in your portfolio pay their dividends, you can build a portfolio that will provide you with income every month, even if they pay quarterly.

Mechanics of dividend payments

There are some terms you must know to be able to understand the mechanics of dividend payments:

  • Declaration date.  This is the date that the company states its intention to pay its next dividend.  Some companies announce this intention much farther in advance of the actual payment date than do others.  The intention to pay dividends is usually made through an announcement on its website and in the financial press.  This is a time for a company to pat itself on the back for continued success, as this announcement shows: Student Transportation Inc. Delivers 95th Consecutive Monthly Dividend. (Most companies don’t trumpet the actual number of consecutive dividend payments in this way, so don’t fret if you don’t see similarly-titled releases.)
  • Dividend record date.  The owners of the company’s shares on this date are entitled to receive the dividend.  This is straightforward enough, BUT there is something else you need to know: If you want to collect this dividend, you have to have bought your shares at least three days before this date — before the ex-dividend date.
  • Ex-dividend date.  When you purchase shares, the transaction takes three days to “settle”.  This means that if you buy shares less than three business days before the dividend record date, the shares will not have been transferred to you, and you will not be eligible to collect that dividend.  It is important to realize that on and after the ex-dividend date, the stock sell ex (i.e. without) dividend(Hence the cleverly named ex-dividend date.)  Before that date, the stock trades cum (i.e. with) dividend. Know this: if you want a particular dividend, you have to buy before not on the ex-dividend date.  I didn’t realize this when I first started investing, and felt ripped off for not being paid dividends that I thought I had been entitled to.  Turns out, it was my mistake.  Grrrr.
  • Payable date.  This is the day that Jerry Maguire looks forward to.  Me too.  As its name suggests, this is that day that the company makes good on its commitment to pay its shareholders.  If you have a brokerage account, the money will usually be available the next business day.  Alternatively, the company can send you a cheque in the mail.

Notes and disclosure:

  • I currently own BMO and BNS through ZWB, a covered call ETF.

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