What are stock dividends?

For starters, it’s good to know what stock dividends are and what they’re based on. Simply put, a dividend is a share of profits that a company distributes to its shareholders. The decision to pay a dividend is made by the annual general meeting of the company’s shareholders, based on a proposal by the board of directors. 

What is the dividend yield and how is it determined?

The dividend yield, which is stated as a percentage, is calculated by dividing the amount of the dividend by the stock price. In Finland, the dividend yield is indicated as a percentage of a stock’s market price instead of its nominal value.

Distribution of dividend

A company may distribute dividends to its shareholders from its unrestricted equity, which usually consists of profits earned in previous financial years. When considering investing in dividend-yielding companies, you should keep in mind that a company must have a profitable business in order to pay dividends. 

Dividend investing

So what is dividend investing? In short, it’s an investment strategy that focuses on companies that pay strong dividends. There are, roughly speaking, two types of dividend investors: 

1.    Those who seek immediate high dividend yields

2.    Those who aim to maximise long-term dividend growth

Both approaches have the same ultimate goal – to maximise the dividend yield on your investment. Where they differ, and sometimes considerably, is in the investment horizon and more detailed investment strategy. 

Here are a couple of tips you should keep in mind when planning on investing in dividend stocks.

Dividend yield or growth?

Investors are often faced with the choice of investing in a company that pays good dividends or one that is focusing on future growth. A growth company can reward you with a large, and sometimes rapid, rise in its stock price, whereas a good dividend yielder provides you with a steady cash flow. 

The flipside of the coin is that growth companies’ business often involves much higher risks than that of a company that grows slowly but pays strong dividends. Ultimately, your choice of investment depends on your preferences and aims as an investor, and you can always invest in both.

Don’t focus on just the past year’s dividend

It’s important to compare the dividend yields of companies over a long period of time instead of only one year. The dividend yield in an individual year doesn’t provide a full picture of the company’s ability to run a profitable business which, after all, is crucial for its capacity to pay dividends over the long term. 

With this in mind, your basic principle in dividend investing should be that the company you invest in must be stable and profitable over a long period of time.

When are dividends paid?

In Finland, the Limited Liability Companies Act states that dividends are paid to shareholders who are recorded in a company’s shareholder register on the record date of the dividend, which is decided at the annual general meeting of the shareholders. 

In practice, you have to own or buy the stock on the date of the annual general meeting at the latest to be eligible for the dividend. Annual general meetings are traditionally held in early spring and dividends are paid shortly afterwards if a decision is taken to pay a dividend. Once the trading date on and after which the dividend is not owed to a new buyer of the stock (ex-dividend date) has passed, the stock’s value usually falls by the same amount as the dividend. However, typically the stock will quickly recoup this loss in its price. 

In contrast with many other countries, dividends are traditionally paid only once a year in Finland. However, in recent years a few Finnish companies have also begun to pay their dividends two or four times a year, which reduces volatility in their stock price and offers shareholders a steadier dividend flow.

In addition to dividends, companies have other ways of distributing profits. These include buying back its own shares from the market or investors.

Dividend calendar

Here you can find information on annual general meetings and dividends to be paid.

Are you interested in Nordea’s dividend?

Go to Nordea’s Investor Relations pages.Opens new window

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