Getting payment from dividend stocks quarterly may be one of the reasons that dividend stocks hold some allure for you and your portfolio.
But what exactly are dividend stocks that pay quarterly dividends? How do they work? It's natural to have some of these great questions swirling around in your head when you first start investing for dividends.
In this piece, we'll walk through the definition of dividends, go over what a quarterly dividend payment is and how dividends are calculated. Finally, we'll walk through how you can achieve quarterly dividends. Let's get started.
What is a Dividend?
First of all, what is a dividend?
Stockholders receive a dividend when a company shares profits with them as an incentive to keep investing with the company.
When a company pays out dividends, it usually pays them out in cash. Companies may also offer additional shares of stock through a dividend reinvestment plan (DRIP), which is a good option if you don't need the dividends right now but would like to collect more shares in your portfolio (possibly to live off later on, such as in retirement). You may also receive dividends in the form of property or when a company liquidates its assets, such as by selling a portion of the company.
There are four key dates to know when a company declares a dividend.
- Declaration date: The declaration date is the date in which the company's board of directors announces that they'll pay out a dividend. During a board meeting, the company's board of directors approves the timing and dividend payment amount. When the company declares a dividend, it also announces the record date and the payment date.
- Record date: The board of directors of a company sets the record date to show the date by which an investor must be on the company's books in order to receive a dividend and this date helps them come up with a list of shareholders who are eligible to receive the dividend.
- Ex-dividend date: The ex-dividend date is set the day before the record date. You cannot receive a dividend payout when you buy on the ex-dividend date or after. In addition, if you sell your shares before the ex-dividend date, you will not receive the dividend.
- Payment date: The payment date is the date that you receive your dividend payout. Typically, the company pays your broker and the broker puts money into your account. It might take a few days for money to make its way into your brokerage account and then into your bank accounts.
Dividends can increase your profits, offer diversification, reduce risk to your portfolio, offer tax advantages and combat inflation.
What is a Quarterly Dividend Payment?
A quarterly dividend means that the company pays its shareholders dividends four times per year. Let's say a company decides to offer 16% of its share price every year. This means that the company will offer four equal payments, each worth 4% of the share price, to shareholders. Most companies declare an annual dividend, which shareholders can receive on a quarterly basis.
A company might also choose to offer an annual, monthly or biannual (also called a semiannual dividend), as outlined below:
- Annual dividends: Annual dividends are those that pay out once per year.
- Monthly dividends: Monthly dividend stocks refer to companies that pay a dividend every month instead of quarterly or annually. You want a monthly dividend income stream if you need to rely on dividends for monthly income.
- Biannual or semiannual dividends: A corporation may also offer a semiannual dividend to its shareholders, which means that shareholders receive dividends twice per year.
You can calculate your own dividends through dividend yield, which is the ratio between the dollar value of a dividend and a company's share price. You can calculate it using a specific formula, but remember that you need to consider other factors before you invest.
The dividend yield formula is an annual dividend payment divided by the share price of the stock, multiplied by 100.
In other words, let's say a company receives a quarterly dividend of 50 cents every quarter. The yearly dividend in this case looks like this: 50 cents x 4 quarters per year = $2.
Let's say you purchased the stock at $200 per share. You can determine the dividend yield with this simple calculation:
- $2 / $200 = 0.01
- 0.01 x 100 = 1%
Repeat the above steps for all different stock holdings to estimate the quarterly dividend amount for each investment and to learn your total quarterly dividend for your portfolio.
Which Type of Dividend Payout is Best?
There's no one dividend payout that's "best," because it doesn't change the payout amount. An annual dividend amount is exactly the same as quarterly and monthly dividends. It simply depends on how often you prefer to receive your dividend payments.
Let's say a company offers a 6% annual dividend, you'd receive the same amount, just payout by year’s end: 6% divided by 12 (on a monthly basis) or 6% divided by 4 (on a quarterly basis).
In short, it comes down to your preferences. If you're a buy-and-hold investor, you probably won't spend a lot of time thinking about how you want your dividends to be paid out because they'll get reinvested so you can buy more shares. It might matter more if you choose to live off your dividends on a monthly basis.
How to Find Companies that Pay Quarterly Dividends
As a quick reminder, most companies declare an annual dividend which is distributed to shareholders on a quarterly basis.
So, how do you find companies that pay dividends? You can research dividend payments from companies by learning more about the indicated annual dividend. Divide the indicated annual dividend by the most recent dividend to figure out whether you'll receive a monthly or quarterly payment from that particular company. Let's go through the steps to find companies that you may want to invest in, including evaluation of stocks and
Step 1: Consider why you're investing.
Write down the reasons why you're investing. Are you saving for a child's college education? Are you saving for retirement? Once you understand why you're investing, you can choose the right stocks that fit your goals and timeline.
Step 2: Evaluate companies.
Do some research on the types of stocks you'd like to purchase. Look at the company's payout ratio, or the amount that goes toward dividends. You can calculate it by taking the yearly dividend per share and dividing it by the earnings per share (EPS). Steer clear of dividend payout ratios that go over 80% because the company may go into debt to pay out dividends.
You want to learn about the dividend yield of each investment you’re considering and look at the fundamentals of each company you’re considering. Look at the company's annual letter to shareholders, balance sheets, SEC filings, quarterly earnings updates and recent news to help you.
Learn more: How to Build a Large Dividend Stock Portfolio
Step 3: Invest in dividend stocks.
Do you already have a brokerage account? If not, it's easy to set up an account. You can either set up an account with a brokerage firm (you choose the investments yourself) or you can also enlist a robo advisor to guide you so you're not completely on your own. You may also want to consider having a financial advisor help you.
Choose the dividend stock you want to buy and purchase the number of shares that fit your budget. You don't want to invest more than you're comfortable losing. Consider investing in solid companies, such as the Dividend Kings or Dividend Aristocrats, which have offered regular dividends for a long time.
Step 4: Receive your dividends.
As long as you buy stock or already own it at least two days before the record date and at least one business day before the ex-dividend date, you will be able to receive the dividend.
Dividends are typically processed automatically. Cash dividends are typically credited as cash to your brokerage account by default. On the other hand, if you elect a DRIP, you reinvest the cash from dividend payments into individual stocks or exchange-traded funds (ETFs).
Recommended: Dividend Stocks Dates: 4 Important Dates to Know and Understand
Consider Dividends for Your Portfolio
There are a lot of great reasons to consider investing in dividends. It's a good idea to consider how you want to receive your dividends, including how often you'd like to receive them. If you want quarterly payouts, go for companies that offer them. If you prefer month-to-month income, however, you may want to look for stocks that pay monthly instead.
Purchasing shares of stock means that you buy a small portion of a company. Consider investing in well-established companies because you can typically depend on them to offer reliable dividend payments, particularly Dividend Kings vs. Aristocrats.
Still not sure which small portion of a company you want to purchase? Take a look at 11 Dividend Stocks with High Yields.