Dividend-paying, mature companies may not be as exciting as fast-growing small-cap companies.  However, the consistency of dividends can create serious earning potential that is healthy for your portfolio.

Financial factors of dividends

By learning about the power of dividend-paying companies, you fully understand how dividends can work for you.  A common misconception with dividends is that a high yield is the most important factor.  However, this is not always the case; the yield may be the result of a depressed price.  Instead, it is more important to look at company quality, looking for dividends that increase in time. 

One important financial factor to evaluate is the dividend payout ratio.  For instance, if the dividend payout percentage remains the same, but the company continues to grow, the percentage equals a larger total amount over time.

For example, you invest $1,000 into a newer stock that is selling at $100 a share.  The firm has a payout ratio of 10%, and thus, you earn a dividend of $1 per share.  Being a savvy investor, you decide to hold onto the stock since the company seems promising.  In a few years’ time, the stock price has gone up to $200.  Since the payout ratio has remained the same, you now receive $2.  You continue to hold onto the stock, and the company starts to grow even further.  Your stock splits 2-for-1 three times, and your holdings are now worth $150 a share.  This means that you now have 80 shares for a total value of $12,000.  Again, assuming the payout ratio has remained constant, you now receive $120.  With time, you could see this amount grow even more.

Dividend payout process

If the great potential of dividend paying companies is appealing to you, then it is important to understand the dividend payment process. 

The company’s board of directors decides to distribute dividends.  There is no contract or obligation forcing companies to pay or continue to pay dividends.  Nonetheless, since most investors look at dividend history as part of their decision to invest, many companies are hesitant to stop or reduce dividend payments.  There are two main types of dividends – cash and stock, with cash being the most popular.

Cash dividends are generally paid out at a set price per share.  They are also usually paid four times a year, though companies may also do a one-time dividend, known as an extra dividend.

Stock dividends happen when the company decides to send out additional shares of stock instead of cash.  For example, you may receive five shares for every 100 shares that you own.  If a fractional amount is leftover, you receive the amount in cash.

A rarely used dividend is the property dividend.  For this type of dividend, a tangible asset is given to investors, such as a popular product.

The dividend dates

There are four dates that are related to paying dividends.  The declaration date is when the board announces that the company will pay a dividend. 

The ex-date or ex-dividend date is when the stock trades without its dividend.  If you buy on or after this date, you are not eligible to receive the dividend. 

The date of record is when the company looks at the records to see who owns shares and how much of a payment each investor is entitled. 

Lastly, the date of payment is when the company mails out dividends.

These dates help to insure that the investors who should obtain the dividends receive them properly.  The ex-dividend date allows for enough time for new investors to get on the record at the company to ensure they receive their dividend.  Since it takes about three days for your name to show up in the company’s records, you have to buy before the ex-dividend date to be in the books in time to receive the dividend.

However, this does not mean that you can make more money by purchasing a stock right before the ex-dividend date.  This is because the entire market knows that a dividend is being issued, and the price of the stock will usually drop by about the amount of the dividend.

If you are looking for long-term stable income for your portfolio, then choosing mature companies that consistently pay out their annual dividends is a great financial strategy.  However, to fully capitalize from dividends, many analysts believe that you should hold the stock for the long term period, allowing you to be shielded from any fluctuations in the market.