Tuesday, February 17, 2015

What is a dividend stock?

A dividend stock is simply a stock that pays out a dividend to shareholders.  The dividend is a payment from the company to anyone who owns the stock. A simple example would be long time dividend stock AT&T (Ticker: T). In 2014 AT&T paid $0.46 per share each quarter. Doesn't sound much but let's do some math to see what you are getting.

Let's assume you purchase 100 shares Jan 2, 2014 @ $34.95/share and held the shares the entire year and received all the dividend payments.

AT&T (T)Q1Q2Q3Q4Total
Dividend (2014)$0.46$0.46$0.46$0.46$1.84

Cost basis 100 shares x $34.95 = $3495
Dividend payment 100 shares x $1.84 = $184 or $46/quarter
Yield $184/3495 = 5.26 %

To be sure you receive the dividend you must purchase the shares before the ex-dividend date. If you purchase the shares on or after the ex-dividend date the seller will receive the dividend payment.

Dividend payments are not guaranteed, meaning the company is not obligated to provide a dividend.  There are many companies that don't pay a dividend.  Usually, a young growing company needs all the capital it receives to continue it's growth.  A mature company that has a large customer base and is making money in a consistent manner will usually pay a dividend.

Disclosure: I do own shares of AT&T.  This article is not intended as a recommendation to buy any stocks mentioned in this article.  I am not paid to write this.