investment question - how do dividends work?

[newtohobby]

I'm all new to this so let say I buy 100 shares of petro canada (pca)

Close Value - PCA $ 28.08
Shares Out. (M) 485
Market Cap. (M$) 13,607
Dividend Rate $ 0.80
Dividend Yield 2.85%
Price / Earning Ratio* 4.4
Price / Book Ratio 0.9

what does the dividend rate or yield mean while I'm hold the shares and what happens when I sell them? thanks

 

[Surfbum84]

You'll get 80 cents per share, so 80 bucks if you buy 100 shares...each year you own the stock...well...on the dividend date but...you'll get 80 bucks. If you sell the stocks, you don't get dividends!

 

[newtohobby]

thanks, whats the yield percentage about?

 

[dunkula]

dividend rate divided by price of security

 

[Mencken]

dividend rate divided by price of security

Price that day only though...so yield can change all the time. It's just the dividend amount divided by the price of the stock at whatever point you are looking at it or comparing it.

So when you see yield quoted be a bit careful...

And dividends can change as well...but that is generally only once a year unless unusual things happen.

 

[moresex4me]

I don't think your initial question on a dividend was answered. It's the company providing the profits from the business, less any re-investment back into the business, back to the shareholders.

Another thing, the value of the stock climbs as the dividend date approaches, because the market knows that $0.80, or whatever, is coming; subsequently it drops after the date the dividends are paid out. Dividend rates can also change depending on how the company is doing, or what their re-investment strategy is, so be careful about that as well. They are not guaranteed, unless you buy preferred shares with guaranteed dividends.

Most companies also have a program where you can re-invest the dividend in more stock. Some people also buy dividend-paying stocks, especially companies that have a history of paying dividends quarterly, using margin accounts and having the dividend cover the interest rate in the margin account. They then ride the, hopefully, rise of the stock basically for free and without putting any of their own money out. If the stock falls and they have to make a margin call, that's trouble.

 

[hinz]

Price that day only though...so yield can change all the time. It's just the dividend amount divided by the price of the stock at whatever point you are looking at it or comparing it.

So when you see yield quoted be a bit careful...

And dividends can change as well...but that is generally only once a year unless unusual things happen.

And do not forget the higher the dividend yield (7%+ all the way up to 20%), the higher the risk of dividend cuts, or worse being scrapped altogether.

BTW, this is also applicable to interests on fixed income

 

[hinz]

They are not guaranteed, unless you buy preferred shares with guaranteed dividends.

True but you could not take advantage on increasing dividends for the common stocks should the economy recovers and the said company is getting profitable.

Plus, many preferred shares are callable in the future. Preferred shares, specifically Canadian ones are essentially "bond substitute" in terms of taxation. They could be helpful to temper the volatility in the non-registered account. There's no benefit to invest preferred shares in RRSP or TFSA unless it's preferred shares issued by US firms but you take additional risk (FX).

Most companies also have a program where you can re-invest the dividend in more stock. Some people also buy dividend-paying stocks, especially companies that have a history of paying dividends quarterly, using margin accounts and having the dividend cover the interest rate in the margin account. They then ride the, hopefully, rise of the stock basically for free and without putting any of their own money out. If the stock falls and they have to make a margin call, that's trouble.

Having an excessive leveraged/margin account without adequate cashflows to cover calls is a bad, sometimes fatal idea. You'll pay a heft price for being toooooo greedy.

As far as dividend reinvestment plan is convern, the DRIP is an excellent idea except you're holding fractional shares and it's not easy to liquidate at market price. Plus, not all discount brokerage provide such service.

 

[Rockslinger]

The mechanics is a bit convoluted but the tax load on a dollar of dividend is about equivalent to the tax load on a dollar of capital gain. Long story short. You are taxed at a preferential rate on dividend income.

 

[hinz]

The mechanics is a bit convoluted but the tax load on a dollar of dividend is about equivalent to the tax load on a dollar of capital gain. Long story short. You are taxed at a preferential rate on dividend income.

That's only applicable to CAD dividends, no luck for USD dividends unless you have those equities in RRSP but again you cannot harvest tax loss selling.

There's no such thing as free lunch

 

[Rockslinger]

That's only applicable to CAD dividends, no luck for USD dividends

Yes, good point. Preferential tax treatment for dividends from PetroCan but not from ExxonMobil or any foreign company that is not a resident taxpayer in Canada.

 

[Rockslinger]

you buy Petro Canada can expecting a dividend and the next day the board of directors cuts it on half,

My best investment in the past 8 years was RIM which never paid a dime in dividends but has gone from $3 to $150 and now is at $85. Worst investment was Citigroup which use to pay a decent dividend and slashed that dividend to 1cent and the stock price dropped 99%. Maybe you should look at utility stocks as they have a fairly stable revenue base.

 

[hinz]

My best investment in the past 8 years was RIM which never paid a dime in dividends but has gone from $3 to $150 and now is at $85. Worst investment was Citigroup which use to pay a decent dividend and slashed that dividend to 1cent and the stock price dropped 99%. Maybe you should look at utility stocks as they have a fairly stable revenue base.

For every RIM, Microsoft, Cisco of the world that started from small cap to successful large cap companies, there're dozens if not hundreds of start ups that probably not going to make it. Picking RIM as investments for the past 8 years are just a combination of sustainable innovation, sound managements and most important of all luck.

Citigroup, on the other hand is a train wreck doomed to happen. Never live up to the hype (synergy, one-stop shop for all of your financial needs whatever) since 1998 merger, this company is a serial M&A candidate with NO plan to slow down and integrate different acquired businesses.

You could get a sense of tension when the heads of Citigroup Commerical, Investments and Retail banking got drunk and beat the hell out of each other during the Christmas Party. The reason for all this was they pointed the fingers to each other for poaching their own clients