Dividends: Complete Guide to Understanding Profitability and the Ex-Dividend Date

Anyone who wishes to build wealth through stock investing must understand a fundamental concept related to them: dividends. They are the reward shareholders receive for contributing capital to a company, representing a portion of the profits the company distributes among its owners.

In this comprehensive guide, we will cover everything from basic concepts to advanced strategies, including critical aspects such as the ex-dividend date, which will determine if you are truly entitled to receive it. Our goal is that by the end, you will understand how to accurately calculate dividends and identify the best opportunities in the equity market.

▶ Key Terminology Every Investor Must Master

Before delving into strategies, it is essential to familiarize yourself with the jargon surrounding dividends. These terms frequently appear in investment analysis and trading platforms.

Dividend Yield: represents the percentage return you will get from holding shares, expressed as a dividend. It is the key indicator for comparing attractiveness among stocks.

Earnings Per Share (EPS): corresponds to net profit divided by the total number of shares outstanding. It is fundamental to understanding the financial health per share.

Pay Out: the percentage of profits that the company allocates to dividend payments. Tech startups often have low or nonexistent pay outs, while established utility companies range around 90-100%.

Price Earnings Ratio (PER): ratio indicating how many times the earnings of a stock equal its current price. Calculated by dividing the price by EPS. A low PER may indicate undervaluation.

▶ What exactly is a dividend?

Companies use dividends as a tool to attract investors and raise capital. By distributing profits among shareholders, they generate an incentive that differentiates some companies from others in the market.

Regularity and stability are crucial. It’s pointless for a company to offer aggressive dividends if it cannot sustain them. Markets severely punish reductions or suspensions of dividends, as they signal financial weakness.

Companies communicate their dividend schedules through official channels, and these are recorded with regulatory bodies of each stock exchange. The information is public and accessible to any investor.

▶ Growth versus Value: the importance of dividends in classification

Dividends mark a fundamental dividing line between two investment philosophies:

Growth Stocks: focused on growth, predominantly technology and biotech. They reinvest their earnings to expand the business, leaving little for dividends.

Value Stocks: established companies with stable cash flows. They use dividends as a retribution strategy. Sectors include utilities, energy, basic consumption, and banking.

The choice between growth and value depends on your objectives: if you seek periodic income, value is your path; if you seek long-term appreciation, growth is more attractive.

▶ CFD and the perception of dividends

Many investors operate through Contracts for Difference (CFD) instead of directly buying shares. CFDs are derivative products whose behavior replicates the underlying asset.

A significant advantage is that CFDs also distribute dividends in line with the company’s policy. So, if you hold an Apple CFD and Apple pays dividends, you will receive them too.

What you do lose is voting rights at Shareholders’ Meetings. However, few individual investors have enough volume to influence corporate decisions of large companies. That power is concentrated in investment funds and large capital.

▶ Do all companies pay dividends?

Generally yes, although there are notable exceptions. Companies in a high-growth phase may choose to reinvest 100% of profits into development, postponing dividends.

It is also possible that dividends are suspended during loss periods. These events generate severe negative reactions in the stock market, penalizing the share price.

▶ The Dividend Aristocrats: the elite of dividends

There is a special category of companies called “Dividend Aristocrats” (Aristócratas del Dividendo). They are companies in the S&P 500 that have paid uninterrupted dividends for 25 years or more, increasing their payout year after year.

Currently, there are 65 companies in this exclusive group. Names like Coca-Cola and P&G are longstanding members, while companies like Church & Dwight have been recently added.

These companies represent stability and reliability in shareholder remuneration, serving as benchmarks for building passive income portfolios.

▶ Types of dividends you will find in the market

There is no single dividend model. Depending on financial situation and corporate strategy, they can be structured in different ways:

Ordinary or interim dividend: payment based on profit projections during the fiscal year, before it ends.

Supplementary dividend: adjusted to the final profits already recorded and confirmed.

Extraordinary dividend: originated by special events such as asset sales, not derived from regular operations.

Flexible or scrip dividend: the shareholder chooses between receiving cash, additional shares, or a combination of both.

Fixed dividend: the classic formula in euros or dollars, approved by the General Meeting based on the year’s results.

▶ Dividends versus coupons: don’t confuse these concepts

Many investors mix these terms, but they are fundamentally different:

Dividends: linked to (equities). They are received by shareholders. They have no predetermined expiration date. Their amount is determined by each year’s results.

Coupons: belong to the (fixed income) world (bonds and obligations). They are received by bondholders (creditors). They have a maturity date. Their yield is known in advance when purchased.

In a five-year bond with annual payments, you invest the principal at year 0, receive coupons in years 1-4, and in year 5, you get the final coupon plus the return of capital.

▶ The ex-dividend date: the concept you must master

The ex-dividend date is the cutoff day that determines who is entitled to receive dividends, regardless of who is the shareholder on the payment date.

If you hold shares until the ex-dividend date, you are entitled to the payout even if you sell the next day. If you buy after that date, you will not receive the dividend.

This date is complemented by two others: the registration date (when the entitlement is determined) and the payment date (when the dividend is actually paid).

Practical example: Banco Santander announces a dividend of €0.8 per share with payment on April 8 and ex-dividend date on April 6. Ramiro owns 300 shares and sells them to Pascual on April 6. On April 8, Ramiro receives the dividend (was owner before ex-dividend) while Pascual receives nothing (bought on or after ex-dividend date).

In international markets, you will find terms like “ex date” (ex-dividend date), “last trading date” (last day with entitlement), and “payment date” (payment date).

▶ How to calculate dividends step by step

Calculating dividends is straightforward. The first step is to determine the Dividend Per Share (DPA):

DPA = (Total Profit × Pay Out %) / Total Shares Outstanding

With the DPA calculated, you can derive the Dividend Yield (RD):

RD = (DPA / Share Price) × 100

Practical example: Banco Dinero earns 10 million euros in profits with an 80% pay out, allocating 8 million to shareholders. With 340 million shares outstanding:

DPA = 8,000,000 / 340,000,000 = 0.0235€

With a current price of €1.50:

RD = (0.0235 / 1.50) × 100 = 1.56%

This means an investor would get a 1.56% return solely from dividends.

▶ Building a winning dividend strategy

An effective dividend strategy requires discipline and does not aim for quick “home runs.” It is a long-term approach based on solid companies.

Features to consider:

1️⃣ Consistent history: companies with steady and increasing payouts over years.

2️⃣ Defensive sectors: utilities, basic consumption, energy, and telecommunications offer greater stability.

3️⃣ Attractive valuation: preference for low PER within their sector, not cross-sector comparison (each industry is different).

4️⃣ Dividend reinvestment: take advantage of compound interest by reinvesting received dividends.

5️⃣ Low debt: companies with low leverage withstand interest rate hikes better without compromising dividends.

6️⃣ Continuous monitoring: even if buy & hold, regularly review quarterly results and financial statements to detect problems early.

▶ Conclusion: dividends as a pillar of profitability

Dividends represent more than simple periodic payments; they are indicators of corporate health and generators of passive income. Their evolution directly influences stock behavior: good news about dividends increases value, bad news penalizes.

Events like the ex-dividend date impact daily trading, with drops typically proportional to the payment made. Even if your strategy does not focus specifically on dividends, understanding this concept is essential for making informed decisions in any equity strategy.