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The Beginner’s Guide: How Dividends Work

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The Beginner's Guide: How Dividends Work

A dividend can be described as a certain amount of money paid by a company to its shareholders depending on the profit made during that particular fiscal quarter. While this seems like an interesting option, it is important to choose reliable dividend-paying stocks.

The profit made by the company is a major factor in how much dividend is paid out to the investors in the company.

One part of the profit is kept aside for the future growth of the company and the rest is dispersed amongst the shareholders. Interestingly, companies do not prefer to reduce the amount they pay as dividend per share as this could lead to panic among the shareholders about the situation of the company. In the worst case scenario, it might even lead to plummeting share market prices.

What Are Dividend Yields

The return offered by any share index or stock is measured using the dividend yield. It can be described as the latest annual dividend obtained by dividing the current share price as a percentage. For example, in the annual dividend is 10p per share, and the share price is £1.00, the yield is 10p/£1 as a percentage, so 10%.

Important Dates To Remember

Dividends need to be approved by the company’s Board of Directors before they are paid out to the shareholders. The following dates play an important role in when the dividend revenues will be paid:

  • Declaration date: This is the date on which the Board of Directors will announce that they intend to pay a dividend. On this date, the Board will put forth a payment date and a date of record.
  • Date of record: Only the shareholders will receive the dividend on or before the date of record.
  • Payment date: This is the date that the dividend is actually paid to all the shareholders.

What Is Dividend Pay-out Ratio?

The dividend pay-out ratio can be described as the percentage of the net income that is paid out as a dividend. The dividend pay-out ratio and the retention ratio are often used to project the growth of the company.For example, if a company had a net income of £4 billion and paid £2 billion in dividends to the shareholders, the dividend payout ratio can be calculated by dividing the dividends paid by the reported net income, which in this case results in £0.50.

So it can be concluded that the company shared fifty percent of its profit with the shareholders during that particular financial quarter or year.

All About Dividend Growth

Dividend growth generally depends on the company. A company whose dividend grew by 20% the past 5 years may decide to cut it the coming year for any number of reasons. As long as the dividend growth is similar to the net profit growth, shareholders need not worry too much. Dividends are often seen as a good source of income among private investors. Interestingly some investors put their dividend returns back into the stock market to build a bigger portfolio.

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Wall Street Week Ahead: Investors weigh new stock leadership as broader market wobbles

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Wall Street Week Ahead: Investors weigh new stock leadership as broader market wobbles 1

By Lewis Krauskopf

NEW YORK (Reuters) – A shakeup in stocks accelerated by the past week’s surge in Treasury yields has investors weighing how far a recent leadership rotation in the U.S. equity market can run, and its implications for the broader S&P 500 index.

Moves this week further spurred a shift that has seen months-long outperformance for energy, financial and other shares expected to benefit from an economic recovery, while a climb in Treasury yields weighed on the technology stocks that have led markets higher for years.

The two-track market left the benchmark S&P 500 down for the week, and sparked questions about whether it could sustain gains going forward if the tech and growth stocks that account for the biggest weights in the index struggle.

So far this year, the S&P 500, which gives more influence to stocks with larger market values, is up 1.5%, while a version of the index that weights stocks equally is up 5%.

“That just tells us the gains are less narrow, more companies are participating, and I think that’s healthy,” said James Ragan, director of wealth management research at D.A. Davidson.

The focus on market leadership comes as investors are weighing whether the S&P 500 is due for a significant pullback after a 70% run since March, with the rise in long-dormant yields the latest sign of trouble for equities as it means bonds are more serious investment competition. The yield on the 10-year U.S. Treasury note this week jumped to a one-year peak of 1.6% before pulling back.

Economic improvement will be in focus in the coming weeks, including the monthly U.S. jobs report due next Friday, as will the country’s ability to ensure widespread coronavirus vaccinations, especially as new variants emerge.

Tech and momentum stocks helped drive returns in 2020 “when everyone was locked down and all they had was their computer,” said Jack Ablin, chief investment officer at Cresset Capital Management. “Now it seems with the vaccines, the stimulus and the prospect of reopening that we are looking out toward a recovery phase.”

The shift in the market this week is building on one that was fueled in early November, when Pfizer’s breakthrough COVID-19 vaccine news generated broad bets on an economic rebound in 2021.

Among the moves since that point: the S&P 500 financial and energy sectors are up 29% and 65%, respectively, against a nearly 9% rise for the benchmark index and 7% rise for the tech sector. The Russell 1000 value index has gained 16.5% against a 4.3% climb for its growth counterpart, while the smallcap Russell 2000 is up 34%.

“You definitely are seeing the reopening trade that has pretty much come alive here,” said Gary Bradshaw, portfolio manager of Hodges Capital Management.

Despite the gains, there remains “plenty of room for the reflation trade to run from a valuation perspective,” Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said in a report this week. RBC is “overweight” the financials, materials and energy sectors.

Rising rates tend to be favorable for more cyclical sectors, David Lefkowitz, head of Americas equities at UBS Global Wealth Management, said in a note, with financials, energy, industrials and materials showing the strongest positive correlations among sectors with 10-year Treasury yields.

Still, how long the market’s reopening trade lasts remains to be seen. Investors may be reluctant to stray from tech and growth stocks, especially with many of the companies expected to put up strong profits for years.

Any setbacks with the economy or with efforts to quell the coronavirus could revive the stay-at-home stocks that thrived for most of 2020.

And with a GameStop-fueled retail-trading frenzy taking hold this year, banks and other stocks in the reopening trade may fail to draw the same attention from amateur investors as stocks such as Tesla, said Rick Meckler, partner at Cherry Lane Investments.

“There isn’t the pizzazz to those stocks,” Meckler said. “There rarely is a potential for stocks to make the kind of moves that big tech growth stocks have made.”

(Reporting by Lewis Krauskopf; editing by Richard Pullin)

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Exclusive: European officials urge World Bank to exclude fossil-fuel investments

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Exclusive: European officials urge World Bank to exclude fossil-fuel investments 2

By Kate Abnett and Andrea Shalal

WASHINGTON (Reuters) – Senior officials from Europe have urged the World Bank’s management to expand its climate change strategy to exclude investments in oil- and coal-related projects around the world, and gradually phase out investment in natural gas projects, according to three sources familiar with the matter.

In the six-page letter dated Wednesday, World Bank executive directors representing major European shareholder countries and Canada, welcomed moves by the Bank to ensure its lending supports efforts to reduce carbon emissions.

But they urged the Bank – the biggest provider of climate finance to the developing world – to go even further.

“We … think the Bank should now go further and also exclude all coal- and oil-related investments, and further outline a policy on gradually phasing out gas power generation to only invest in gas in exceptional circumstances,” the European officials wrote in the letter, excerpts of which were seen by Reuters.

The officials took note of the World Bank’s $620 million investment in a multibillion-dollar liquified natural gas project in Mozambique approved by the Bank’s board in January, but did not call for its cancellation, one of the sources said.

The World Bank confirmed receipt of the letter but did not disclose all its contents. It noted that the World Bank and its sister organizations had provided $83 billion for climate action over the past five years.

“Many of the initiatives called for in the letter from our shareholders are already planned or in discussion for our draft Climate Change Action Plan for 2021-2025, which management is working to finalize in the coming month,” the Bank told Reuters in an emailed statement.

The Bank’s first climate action plan began in fiscal year 2016.

The United States, the largest shareholder in the World Bank, this month rejoined the 2015 Paris climate accord, and has vowed to move multilateral institutions and U.S. public lending institutions toward “climate-aligned investments and away from high-carbon investments.”

World Bank President David Malpass told finance officials from the Group of 20 economies on Friday that the Bank would make record investments in climate change mitigation and adaptation for a second consecutive year in 2021.

“Inequality, poverty, and climate change will be the defining issues of our age,” Malpass told the officials. “It is time to think big and act big in finding solutions,”

He said it was also launching new reviews to integrate climate into all its country diagnostics and strategies, a step initiated before the letter from the European officials, said one of the sources.

(Reporting by Andrea Shalal in Washington and Kate Abnett in Brussels; Additional reporting by Valerie Volcovici in Washington; Editing by Matthew Lewis)

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GameStop rally fizzles; shares still register 151% weekly gain

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GameStop rally fizzles; shares still register 151% weekly gain 3

By Aaron Saldanha and David Randall

(Reuters) – GameStop Corp closed 6% lower on Friday as an early rally fizzled but the stock finished the week 151% higher in a renewed surge that left analysts puzzled.

The video game retailer’s shares closed at $101.74 after retreating from a session high of $142.90. The weekly rocket ride higher came despite a broader market selloff that sent the benchmark S&P 500 <.SPX> down 2.5% over the same time.

Analysts have struggled to find a clear explanation, and some were skeptical the rally would have legs.

“You might be able to make some quick trading money and it could be a lot of money, but in the end, it’s the greater fool theory,” said Eric Diton, president and managing director at The Wealth Alliance in New York. The theory refers to buying stocks that are over-valued, anticipating a “greater fool” will buy them later at a higher price.

Analysts mostly ruled out a short squeeze like the one that fueled GameStop’s rally in January, when individual investors using Robinhood and other apps punished hedge funds that had bet against the stock, forcing them to unwind short positions. Many GameStop buyers took their cues from online investment forums on Reddit and elsewhere.

Short interest accounted for 28.4% of the float on Thursday, compared with a peak of 142% in early January, according to S3 Partners.

Options market activity in GameStop, which has returned to the top of the list in a social media-driven retail trading frenzy, suggested investors were betting on higher prices, higher volatility, or both.

Refinitiv data showed retail investors have been buying deep out-of-the-money call options, which have contract prices to buy far higher than the current stock price.

Many of those option contracts were set to expire on Friday, meaning handsome gains for those who bet on a further rise in GameStop’s stock price.

Call options, profitable for holders if GameStop shares hit $200 and $800 this week, have been particularly heavily traded, the data showed. GameStop’s stock traded this week as high as $184.54 on Thursday, far below the $483 intraday high it hit in January.

“The actors are looking to take advantage of everything they can to maximize their impact and the timing is important,” said David Trainer, chief executive officer of investment research firm New Constructs. “The options expiration will contribute to their strategy on how to push the stock as much as they can and maximize their profits.”

Bots on major social media websites have been hyping GameStop and other “meme stocks,” although the extent to which they influenced prices was unclear, according to analysis by Massachusetts-based cyber security company PiiQ Media.

The U.S. Securities and Exchange Commission (SEC) on Friday suspended trading in 15 companies because of “questionable trading and social media activity.” GameStop was not among them.

The 15 companies were in addition to six stocks it recently suspended due to suspicious social media activity.

Robinhood said it has received inquiries from regulators about temporary trading curbs it imposed during a wild rally in shorted stocks earlier this year.

Other Reddit favorites were also lower on Friday, with cinema operator AMC Entertainment down 3.4%, headphone maker Koss off 22.4% and marijuana company Sundial Growers down 2.9%.

(Reporting by Aaron Saldanha in Bengaluru; additional reporting by Caroline Valetkevitch in New York, and Devik Jain and Sruthi Shankar; Writing by David Randall; Editing by Alden Bentley, Shinjini Ganguli, Anil D’Silva, Dan Grebler and David Gregorio)

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