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12/01/2022

Stock market basics : What are dividends ?

Dividends, an essential part of stock portfolio performance

Dividends are profits that a company pays to its shareholders. Thus, the holder of a portfolio of securities can draw an income from it, even without buying and selling shares.

What is a dividend ?

Private companies, whether listed on the stock exchange or not, aim to make a profit. When they succeed in doing so, which is normally the case after the initial development phase, companies can choose to keep profits for future investments, or to distribute all or part of them to shareholders. The portion distributed is divided among the shareholders according to the number of shares they own, and the distribution per share is called a “dividend”, as it results from dividing the amount paid by the number of shares outstanding.

How much does a dividend pay ?

The yield on a share, i.e. the proportion between the dividend paid and the share price, varies greatly depending on the stock. It can be zero for fast-growing companies that choose not to pay a dividend in order to maintain maximum financial leverage for their development: this is often the case for companies in the digital sector or biotechs.

Conversely, the yield can be high for more mature companies, either following a drop in their stock price or because they are generating high profits. Excluding special situations, the return on a stock can reach up to 5% or 6%, which is much higher than what is provided by a regulated savings account, or even bonds !

How are dividends paid ?

The amount of the dividend is decided by the general meeting of the company. The payment may be made once a year, or it may be preceded by one or more interim payments: for example, the oil company Total, well known to investors for its generous dividends, makes four payments a year (one every quarter). The payment is known as "ex-date", and the money from the company's account book is credited directly to the current account associated with the securities account.

The dividend is a profitability booster for a portfolio. It is also a safety net in the event of a stock market downturn, as the most generous shares are protected from an excessive drop by their yield. It is thus possible to generate real recurring income with a stock exchange portfolio, provided that you understand the stock exchange well enough to select the right securities.

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