What is a Dividend?
A dividend is a portion of a company's profits distributed to its shareholders. Since you can receive dividends simply by holding shares, they are also referred to as "income gains" and represent one of the most important sources of returns in stock investing.
However, not all companies pay dividends. Companies in growth phases often reinvest their profits into business expansion and research, choosing not to pay dividends. On the other hand, large, established companies with stable earnings tend to pay dividends consistently.
Key Concepts of Dividends
How Are Dividends Determined?
Dividend amounts are proposed by the company's board of directors and approved at shareholder meetings. They are typically expressed as a fixed amount per share. For example, if a company pays a dividend of 50 yen per share and you hold 100 shares, you would receive 5,000 yen in dividends.
Requirements for Receiving Dividends
To receive dividends, you must hold shares on the "record date." In Japan, many companies set their record dates at the end of March and September. Since stock settlement takes two business days (T+2), you need to purchase shares at least two business days before the record date.
What is Dividend Yield?
Dividend yield is an indicator showing how much dividend income you receive relative to your investment. The formula is:
- Dividend Yield (%) = Annual Dividend per Share / Stock Price x 100
For example, if a stock is priced at 1,000 yen and the annual dividend is 30 yen, the dividend yield is 3.0%.
Types of Dividends
- Regular dividend: Paid from normal business profits
- Special dividend: Additional payments for milestones or exceptional performance
- Interim dividend: Paid semi-annually, allowing two payments per year
Key Points for Beginners
- Dividends are passive income earned simply by holding shares, but choosing stocks based on dividend yield alone is risky. Companies may reduce or eliminate dividends due to poor performance
- In Japan, dividends are taxed at approximately 20%. Using a NISA account allows you to receive dividends tax-free
- Companies that consistently increase their dividends year after year are called "consecutive dividend growers" and are popular among long-term investors
- There are multiple methods for receiving dividends, including direct bank transfer and postal service pickup
Summary
Dividends represent a portion of company profits returned to shareholders and are an important source of income in stock investing. You can receive them by holding shares on the record date, but not all companies pay dividends, and payments may be reduced or eliminated based on company performance. It is important to evaluate not just dividend yield but also the company's overall financial health and growth potential.