All you need to know about dividends

Investing in a company means you are taking a certain level of risk and putting your own capital at stake. To reward this risk-taking, companies may decide to pay dividends. This is another way to make your money grow faster. In this article, we’ll explain how they work.

Main points:

  • Dividends are a share of profits distributed from a company when you invest in them.
  • Companies do not automatically pay dividends, and the amount may vary.
  • Certain stocks and ETFs are well-known for delivering the strongest dividends on the market.

Definition of a dividend

In finance, a dividend refers to the money a company pays to its shareholders. This money comes directly from the company’s profits or from its cash reserves. Dividends are therefore considered ‘income’ and are paid proportionally to shareholders according to the number of shares they own. Generally, dividends are issued quarterly.

For example, if you owned 50 Apple shares in 2020, with a dividend set at $2.62 per share, then you’d receive $131 in dividends (€110). You can keep this money or reinvest it straight back into the company for the chance to generate even more earnings. Some companies may offer to pay a ‘stock dividend’ whereby it issues more shares to investors instead of paying cash directly.

The terms of payment of a dividend

Companies tend to hold annual investor meetings where the dividend payment is decided. It’s important to note that dividends are not always distributed to shareholders and can be changed or removed at any time! While they are an effective way to generate earnings, you shouldn’t just rely on them when investing.

What influences a company’s dividend policy?

  • The financial health of the company. There are many things that might impact a company’s fundamentals: a bad quarter, a fall in demand, a scandal. Any of these things might cause the company to reduce or remove its dividend payment. Younger companies often pay smaller dividends (or no dividends at all) when compared to more mature businesses. They prefer to invest all their money into growth.
  • The global economic context. With the Covid-19 crisis, for example, many companies decided not to pay a dividend in 2020 and 2021. Dividends also fell drastically during the 2008 crisis, and some companies took almost ten years to build back up to previous levels of dividend payouts.
  • Medium and long-term prospects. Some companies may choose to prioritize money for other projects, for example, hiring a new team or expanding into a new market. In that case, the company may choose to reduce or cancel its dividend payment to finance the project.

How do I receive dividends?

If the company has agreed to a certain dividend payment and schedule, here’s how you will receive the money.

  • First of all, timing is important. A share is known as ‘ex-dividend’ when the company decides to set a date for its payment. If you invested before this date, you will receive the dividend. If you invest on or after the date, you’ll have to wait until the following quarter (subject to the company paying it). The ‘ex-dividend’ date often causes a stock to drop temporarily as investors rush to get in before.
  • The company then makes cash available for the payment date. You’ll receive the payment on this date, or a few days after depending on transaction deadlines.

If you invest with BUX Zero, we make the dividend money automatically available to your account after the payment is made by the company. 

Choose your investments based on dividends

If dividends are an important consideration for you, then you need to know which sectors and companies are most likely to pay out.

Companies that pay the best dividends

Companies in the banking industry like JPMorgan Chase and Wells Fargo, or in the oil industry like Total and Shell are famous for their generous dividend policies. Telecommunications is another industry to watch, with companies like Verizon and AT&T well-known for their dividend payments.

In Europe, it is mainly German companies that stand out: Allianz, for example, or Bayer and Deutsche Post.

We mentioned that the Covid-19 crisis had slowed down the dividend payments from several companies in 2020. However, some, like Adidas, have decided to resume their payment in 2021. Others have actually increased them! This is the case for pharmaceutical group Abbvie (+10%), and some tech companies like Apple (+6%) and Microsoft (+10%).

Distribution of dividends with ETFs

An exchange-traded fund (ETF) is a basket of assets that often includes stocks. As a result, ETFs pay aggregate dividends according to the shares in the basket.

As with equities, ETF dividends are distributed in cash or in the form of new shares. Dividends can also be automatically reinvested in the fund, allowing you to increase your capital and reap the benefits of compound interest over the long term.

Below are some examples of ETFs available on BUX Zero that offer high dividend exposure:

  • All-World Dividend (Vanguard), which includes some of the largest dividend-paying American companies like JPMorgan, Procter & Gamble and PepsiCo for example.
  • Nasdaq 100 Index, filled with US technology stocks including FAANG (Facebook, Apple, Amazon, Netflix and Google).
  • EU TOP 50 Index (iSHARES), which follows the EURO STOXX 50 index. It contains the 50 largest companies in the eurozone including Airbus, L’Oréal and SAP.

On BUX Zero, we’ve also listed stocks and ETFs that have a solid history of paying dividends to help you make the best choices. You can find this category directly in the app!

All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.