the Complete Guide to Dividends, From Ex-Dividend Date to How to Get Them

what are dividends?

dividend stocks are all the rage among stock investors these days, as they offer a higher return than bank interest and the potential for share price appreciation. But what exactly are dividends?

dividends are money that a company shares with its shareholders out of the profits it makes. In short, it's a way for a company to give back some of the money it's worked hard to earn over the course of the year. It's a bit like investing in your local shop and getting a pocketful of pocket money at the end of the year as a thank you.

a company that consistently pays dividends is a sign of financial stability and shareholder-friendly management, which is why many investors are interested in dividend stocks.

the difference between cash and stock dividends

there are two main types of dividends: cash dividends and stock dividends.

cash dividends are exactly what they sound like: cash distributions from a company to its shareholders. This is the most common form of dividend, and it's convenient because it's directly deposited into your brokerage account, so you don't have to sign up or go through any complicated processes.

stock dividends are paid in shares instead of cash. The company issues new shares, converts the profits into shares, and distributes them to shareholders. This increases the number of shares you own, but it also increases the total number of shares in the company, which can affect the stock price.

most retail investors prefer cash dividends because they give you immediate cash flow and you can choose whether or not to reinvest it.

dividends in a nutshell

receiving dividends is actually pretty straightforward: you just need to own shares of the company on the ex-dividend date.

companies set the ex-dividend date and amount at their shareholder meetings, so investors know in advance how much they'll receive and when.

for example, if Company A's ex-dividend date is December 31, anyone who owns shares of Company A by that date will receive a dividend. If you want to receive a dividend from a particular company, you'll need to check the ex-dividend date and buy shares before that date.

but here's the catch: the shares don't actually hit your account until two business days after you buy them, which is called the settlement date. So you'll need to buy shares at least two business days before the ex-dividend date to get your name on the shareholder list.

understanding ex-dividend dates and dividend drop dates

there are three dates you need to know when investing in dividend stocks.

first, there's the ex-dividend date, which is often used interchangeably with the ex-dividend date because it's the day the company finalizes the list of shareholders who will receive dividends. You need to be on the list to be eligible to receive dividends.

second, there's the ex-dividend date, which is the day after the ex-dividend date, and if you buy shares from that day forward, you won't get the dividend. On ex-dividend days, the stock price tends to drop by the amount of the dividend, which is easy to understand if you think of it as the dividend getting siphoned off.

third, there's the ex-dividend date, which is when the dividend is actually deposited into your account. This is usually a month or so after the shareholders' meeting, but it varies by company, so it's best to check the disclosure.

how to calculate dividends

calculating dividends isn't difficult because you get paid in proportion to the number of shares you own.

the formula is simple: dividend per share multiplied by the number of shares you own equals the total dividend you'll receive.

for example, Company B decides to pay a cash dividend of KRW 1,000 per share. If I own 100 shares of Company B, I will receive a total dividend of KRW 1,000 multiplied by 100 shares, totaling KRW 100,000. If I only own one share, I will receive KRW 1,000.

dividend yield is also an important indicator. It shows the ratio of dividends to stock price, and the higher the dividend yield, the better the dividend return on investment. It's helpful to utilize this indicator when looking for high-dividend stocks.

what to look out for when investing in high-dividend stocks

a high dividend isn't always a good thing, and there are a few things to keep in mind when investing in high-dividend stocks.

it's safer to invest in a company that's been paying dividends consistently than a company with a temporarily high dividend. Look at the dividend history over the last few years.

a company's financial health is also important - if it's losing money and paying out too much, it could be a red flag. Look at retained earnings and cash flow together.

if the stock price drops on an ex-dividend date, you could end up with a negative overall return even if you receive a dividend. It's best to take a long-term investment approach.

frequently asked questions

Q. how long do I need to hold a stock to receive dividends?

A. It doesn't matter how long you hold the stock, you can hold it for as little as one day before the ex-dividend date to receive the dividend, but you should buy it at least two business days before the ex-dividend date to allow for the stock settlement date.

Q. are dividends taxed?

A. Yes, dividends are subject to dividend income tax. Generally, 15.4 percent of the dividend is withheld and the rest is deposited into your account. If your annual financial income exceeds 20 million won, you may be subject to a comprehensive income tax return.

Q. can I receive dividends from foreign stocks?

A. Yes, foreign stocks do pay dividends, but it's best to check the tax structure beforehand as foreign dividends can be subject to both local and domestic taxes.

Q. where will my dividends be deposited?

A. Dividends are automatically deposited into your account with the brokerage firm that holds your shares. You don't need to sign up for anything, and they'll arrive on the ex-dividend date.

Q. can I buy shares and sell them right before the ex-dividend date?

A. Yes, you can, as long as you're on the shareholder list on the ex-dividend date, you'll be eligible to receive the dividend. However, you'll need to factor in the share price decline due to the ex-dividend, which may not be as profitable in the short term.

wrapping up

dividends are another source of income from stock investing. They're available to anyone who owns shares on the ex-dividend date, so make sure to check the ex-dividend schedule for the companies you're interested in.

if you have any more questions about investing in dividend stocks, let us know in the comments. and don't forget to subscribe to our blog for more great investing tips.