While having dinner over the weekend, my wife told me that we should “get into dividend investing” so we can “retire early”.
This was after a meetup with a couple of girlfriends who for some reason went from talking about when is the best time to try for a kid to retiring early on income from dividend-paying stocks.
And apparently, they were sprinkling the term “dividend investing” around more liberally than I do with parmesan cheese on my spaghetti bolognese.
Context: Both she and I are noobs when it comes to dividend investing. But she figured that since I was writing about personal finance, I had the closest shot of figuring out how we can live off our dividends into our retirement.
took advantage of invested precious working hours to scour the Internet in order to round up this collection of commonly asked questions and answers about dividend investing. All for my… I mean. Your dividend investing benefit.
Everyone wins what.
Presenting… The Noob AF Guide To All Things Dividend Investing
Written in a way which shouldn’t bore the crap out of people:
- Why Dividends?
- What Are Dividends?
- What Is A Special Dividend?
- Cash Or Stocks Dividend Option?
- Are Dividends Taxable?
- Why Are There So Many Dates?
- What The Hell Is Cum-Dividend?
- Why Do Stock Prices Fall Whenever Ex-Dividend Date Is Declared?
If you’re an investor who would like to draw a regular income from your investments, then dividend investing is probably the way to go.
Yes, high-growth stocks have the potential to experience HUGE share-price gains which translates to high returns – on paper anyways until you decide to sell the stock.
But dividend investing offers investors a way to draw an income from their investments as well as enjoy the fizzy feeling one gets when you see your share prices go up.
One of the best examples would be a dividend stalwart like Coca-Cola (NYSE: KO) which has paid a quarterly dividend since 1920 (that has increased over the years) AND has seen their share price rise steadily as well.
What Are Dividends?
Dividends are a distribution of a portion of a company’s earnings, decided by the board of directors, to be paid to you – the shareholder. Simply put, dividends are what the company pays you for holding onto their stocks.
It’s also a common misconception that a dividend-paying stock will ALWAYS pay you dividends. Newsflash: dividends are not compulsory.
Oh, and on top of this, dividends can also be paid out on a yearly, quarterly, or monthly basis. Or even randomly without a fixed schedule.
So. Much. Uncertainty. For. My. Retirement.
Most companies that pay out dividends will usually adhere to some kind of frequency. Take Singtel (SGX: Z74) for example which pays an interim dividend in the second quarter and then a final dividend for the fourth quarter of the year.
However, it would be wise to keep in mind that a stock that pays you dividends today may not always pay you dividends tomorrow.
Especially if the company believes that the money could be better used to start a new project, acquire new assets, or even buy out another company in order to increase the company’s value. And that’s not a bad thing either.
Well… Bad if you’re banking on that dividend payout to survive.
If you are looking to collect $12,000 in Dividends per year, we did the calculation for you!
What Is A Special Dividend?
For those who noticed that Singtel paid special dividends in 2011 and 2018.
I got you, bruv.
Special dividends are dividends that are given out on top of the usual dividend payouts you see from a company.
It’s a one-time thing that should be treated as a bonus.
Generally speaking, special dividends are issued after a company experiences a period of particularly strong earnings. Or, it could be announced at a time when it wants to change say… It’s financial structure. And thus acts as a sweetener for stockholders.
Singtel’s CEO Chua Sock Koong had this to say about Singtel’s special dividend in 2011, “Since we have not made significant acquisitions in the last few years, in an attempt to get into the optimum capital structure, we proposed this special dividend.”
Make what you will of that information. #justsaying
Cash Or Stocks Dividend Option?
A company can choose to pay out dividends in the form of cash or shares of stock. Both should be of the same value although sometimes there might be a discount if you took shares instead.
A good example of this would be OCBC (SGX: O39) which applied the Scrip Dividend Scheme in 2015 to their final dividend.
This gave shareholders the option to receive the final dividend in the form of shares instead of cash. The shares were also issued at a 10% discount to the average daily volume-weighted average price.
For illustration, I’m going to take the average price of OCBC in 2015 at $9.85.
Therefore, the price of an OCBC share discounted at 10% is $8.87.
So if you are supposed to receive $443.50 in cash dividend, you should receive 50 OCBC shares under the Scrip Dividend Scheme instead.
And no, you cannot choose both.
Are Dividends Taxable?
Here’s what the explanation looks like in legalese:
Here’s what you need to know in simple English: Dividends from Singapore companies listed on the Singapore Stock Exchange are not taxable.
Why The &^$% Are There So Many Dates?
Dividends have many dates that will naturally confuse beginners.
Like seriously, it’s like they’re trying to fill out the minimum word count or something by coming up with soooo many dates.
Let’s look at CapitaLand’s (SGX: C31) most recent Dividend Announcement to talk about some of the more important ones.
1. Announcement, Broadcast, and Declaration Date
The date that the company’s board of directors announces, broadcasts, or declares when the company will pay a dividend. The Ex-Dividend date, Record date, and most importantly, Pay Date are all included in the announcement.
In this case, CapitaLand’s Announcement Date is on 18 March.
2. Ex-Div, Ex-Dividend Date, Ex-Date, and XD
Note: the last one is NOT an emoticon of a smiley face guffawing with its mouth open and eyes closed.
The date that the stock trades without the value of the next dividend payment. So if you bought a stock on or after the Ex-Dividend date, you are not entitled to the declared dividend. You must own the stock the day before the Ex-Div date in order to qualify for the dividend payout.
CapitaLand’s Ex-Div date is 23 April, meaning you must buy the stock on 22 April or anytime before that in order to get the dividend.
And just in case you were wondering: You can sell the stock after the market opens on 23 April and still collect the dividend.
3. Record Date
The date that the company looks at its records to see who the shareholders are. This date usually occurs 1 to 2 business days after the Ex-Dividend date.
If you own CapitaLand’s stock the day before the 23 April, you will be listed as a shareholder on 24 April and be paid accordingly.
4. Pay Date, Date Paid, And Date Payable
The date that the dividend is paid. Duh.
For CapitaLand, you’ll be paid $0.12 per share on 7 May. Woohoo!
What The Hell Is ‘Cum-Dividend’?
This one’s a little special.
Also, please get your head out of the gutter.
A stock with a status of Cum-Dividend or CD means that the company is paying out dividends in the future. Think of it as a notice of the amount of dividend to be paid out but the company has yet to do so.
So why is this important to understand?
If you sell a stock during the CD period, you no longer qualify for the dividend and will not receive any payout.
If you buy a stock during the CD period, you will be entitled to the promised dividend.
Why Do Stock Prices Fall Whenever Ex-Dividend Date Is Declared?
If your investment strategy is to sell a stock the minute you are entitled to a dividend, you might want to think twice.
Why? Because the stock price will usually gap down (read: open at a lower price than yesterday’s closing price) to reflect the payout of the dividends.
- Ex-Div is 7 August
- Closing stock price is $10 on 6 August
- Declared dividend is $1
- Stock price will most likely open at around $9 on 7 August, taking into account the $1 dividend that is paid out
A live example would be DBS Group Holdings Ltd (SGX: D05.SI)
- Ex-Div was 8 August 2018
- Closing stock price was $26.79 on 7 August
- 9 August was National Day (Singapore stock market closed)
- Declared dividend was $0.60
- Stock price opened at $25.71 on 10 August, taking into account the $0.60 dividend that was paid out
The alternate explanation for this is: shareholders who buy when the shares go XD are not entitled to the dividend, and naturally they would be willing to pay less than what the shares were worth pre-XD (when they came with dividend entitlement).
Or more simply, bubble tea with pearl (the “dividends”) costs $1. But if I told you that from tomorrow onwards, that same bubble tea will not come with pearls. Would you still pay $1? Or would you expect to pay slightly lower?
Will I Be Dabbling In Dividend Investing?
Speaking as a complete noob to this topic before reading and distilling the above information, I’d say, “Yes. Why not?”
It’s not as sexy as watching a $0.10 investment in a company become $100 overnight, but hey… I’m convinced that a diversified portfolio consisting of both growth and dividends stocks might just be the way to “retire early”.
Mad props to the wife for prompting this bit of self-study.
Oh, and if you’ve got any other more questions regarding dividend investing, be sure to check out Seedly Q&A! Where you can find answers to questions like:
It’s filled with questions asked by people like you and me, which are also answered by people (including industry experts, professionals, and self-taught gurus) like you and me!
Now… If only I can get her to read whatever I found so we can discuss how we want to act on this…