dividends are one of the returns you get from investing in stocks. we explain in easy-to-understand terms what you need to know about dividends, from the concept of dividends as a distribution of a company's profits to shareholders, to the difference between cash and stock dividends, ex-dividend dates, and dividend drop dates. plus, tips for investing in dividend stocks.

dividend stocks have become very popular among stock investors in recent years. this is because they offer a steady stream of cash flow while still earning a higher return than bank interest. Dividends are especially attractive because they're like a bonus. In this article, we'll break down the nitty-gritty of dividend stocks: what they are and how to receive them.

what are dividends (cash vs. stock dividends)?

a dividend is money that a company gives away as part of its profits to its shareholders. there are two ways dividends can be paid: first, a "cash dividend" is exactly what it sounds like: a company pays out a portion of its profits in cash to shareholders, so you get the money directly in your account.

second, there's a "stock dividend," which is when a company issues new shares of stock to pay a dividend instead of cash. it's a way for a company to return profits to its shareholders without having to pay out cash. For example, a stock dividend of 5% per share would mean that for every 100 shares a shareholder owns, they would receive an additional 5 shares of new stock. this increases the total number of shares outstanding, but for the shareholder, it only increases the number of shares, not the percentage of ownership.

how to receive a dividend: ex-dividend date and cut-off date

receiving a stock dividend is actually quite simple. the ex-dividend date (also known as the record date) is the date on which the company says, "We're giving a dividend to anyone who owns shares on this date!" If your name is on the shareholder list on this date, you're eligible to receive a dividend.

however, you need to take into account the settlement date of the stock transaction. Since the Korean stock market uses the T+2 day settlement method, it takes two days from the time you buy a stock to the time you are actually recorded as a shareholder. This is where the ex-dividend date comes in. the ex-dividend date is the day when you lose the right to the ex-dividend date. the ex-dividend date is usually the day before the ex-dividend date, which means that if you want to receive a dividend, you need to buy the stock before the ex-dividend date.

for example, if the ex-dividend date is December 31, you only need to buy shares by December 29 to receive this dividend. December 30 is the ex-dividend date, and anyone who buys new shares on that day will not be on the shareholder list and will not receive the dividend. conversely, if you held your shares until December 29, you can sell them on December 30 and still receive the dividend because you're on the shareholder list as of December 31.

so when are dividends paid? dividend payment dates vary slightly from company to company, but they are usually paid within a month or two after the dividend is declared. for year-end dividends, they're usually deposited into your account around April after they're approved at the AGM (in March of the following year). (Companies that pay interim or quarterly dividends have a separate process for paying them at that time)

how to calculate dividends (how much will I get?)

calculating dividends is pretty easy: multiply the dividend amount per share by the number of shares you own. For example, if a company decides to pay a cash dividend of 1,000 won per share, you'll receive 1,000 won if you own 1 share of that company, or 100 won ($100) if you own 100 shares. the amount is proportional to the number of shares you own, so the more you own, the more you'll receive.

there's also a metric that investors often look at called the dividend yield, which is the ratio of the dividend to the stock price. for example, if a stock with a price of 20,000 won pays a dividend of 1,000 won, it has a dividend yield of 5%. Higher numbers are called "high dividend stocks" and are popular because they offer a higher rate of return than bank deposits.

dividend investing strategies and "high dividend stocks

dividend investing is a strategy that combines long-term investments in relatively stable companies with stock price appreciation and dividends. it's attractive to investors looking for steady cash flow, and "high dividend stocks" are especially popular because they have high dividend yields, which means that the payout itself is large each year.

however, there are a few things to keep in mind when investing in dividend stocks: you have to buy the stock before the ex-dividend date to receive the current dividend, and the stock price tends to temporarily drop by the amount of the dividend on the ex-dividend date because the dividend payment is a cash outflow from the company. in some cases, the temporary drop in the stock price has only increased the dividend yield, so you also need to make sure the company is stable enough to maintain a high dividend on a consistent basis. In other words, when choosing a "high dividend stock," it's a good idea to look at the company's financial condition and profit sustainability.

frequently asked questions (FAQs)

Q. how long do I have to buy a stock to receive the dividend?
A. You need to buy shares at least two trading days before the ex-dividend date to get on the payout list. For example, if the ex-dividend date is June 30, you need to buy by June 28.

Q. if I sell my shares on the ex-dividend date, will I miss out on the dividend?
A. No. The ex-dividend date is a date after we have already determined who will receive the dividend. if you are a shareholder on the ex-dividend date, you can sell your shares on the ex-dividend date and still receive the dividend. However, it is not uncommon for the stock price to drop by the amount of the dividend on the ex-dividend date.

Q. are dividends taxed?
A. Yes. dividends from domestic stocks are subject to a 15.4% dividend income tax withholding, so the amount you see in your account is after taxes.

the bottom line

dividends are a bonus payment for sharing in a company's profits. we've covered what dividends are, how to receive them, important dates, and even investment strategies. We hope this was helpful for anyone interested in dividend stocks. 🙂

let us know in the comments if you enjoyed this article and if it answered your questions about dividends. and don't forget to subscribe to the blog and sign up for our newsletter for more investing stories!