What Are Dividends?

TThere are two ways to make money from stocks: selling them for more than you paid or receiving dividends. We explain what these payouts are and how to properly build a dividend portfolio.

What are dividends?

Dividends are a portion of profits that a company distributes to its shareholders. For a business, this serves as a way to attract long-term investors and maintain interest in its securities.

The decision to pay dividends is made by the board of directors and approved by the general meeting of shareholders. They also determine the payment frequency: some issuers pay annually, while others pay semi-annually or quarterly. Specific rules are outlined in the dividend policy—a document available in the shareholder section of any public company’s website.

It is important to understand that sharing profits with investors is a company’s prerogative, not an obligation. Funds can instead be allocated toward business development, debt repayment, or the acquisition of competitors. Even a long track record of consistent payouts does not guarantee that the situation will remain the same in the coming year.

How to receive dividends?

To receive dividends, you must own the shares by a specific date known as the “record date” (or cutoff date). This is the day the company finalizes the list of shareholders eligible to receive the payout.

When buying securities, it is important to consider the trading settlement cycle: a stock exchange transaction usually settles on the next business day rather than at the moment of payment. Therefore, to be included in the shareholder register, you must purchase the shares before the record date, not on the day itself. For example, if the record date is Tuesday, you need to buy the shares no later than Monday.

Once the register closes, the company begins distributing payments to shareholders. Dividend taxes are typically withheld by the broker, so the investor receives the net amount directly into their account.

The easiest way to track upcoming payouts is by using a dividend calendar, a feature available in many broker apps. These calendars allow you to view expected payout amounts and record dates for companies of interest in advance.

How to calculate dividend yield?

This specific metric allows you to compare securities with one another and with other financial instruments, such as bank deposits.

Calculating the yield is simple: divide the dividend amount per share by the share price and multiply by 100. For example, if a share costs $1,000 and the company pays an $80 dividend per share, the yield is 8%. However, the broker will automatically withhold a percentage for taxes; consequently, the amount deposited into your account will be net of tax, and the actual yield will be lower than 8%. This net figure is the one you should use for your assessment.

Yield can be calculated in two ways: based on the current price or based on the purchase price. The first method indicates how attractive the security is right now, while the second shows the return on money already invested. These figures can differ significantly: if a share’s price rises, a new buyer will receive a lower yield for the same dividend amount. However, for an investor who purchased the security earlier at a lower price, the yield on invested capital remains unchanged, and they also benefit from the appreciation in the share price.

Information regarding upcoming payouts and historical dividend data can usually be found on the specific stock’s page within the broker’s app.

What is a dividend gap?

A dividend gap is a drop in a stock’s price that occurs on the trading day following the ex-dividend date. The share price falls by approximately the amount of the dividend per share.

Before the shareholder register closes, a buyer acquires the right to the upcoming dividend payment along with the stock itself. After the ex-dividend date, that right belongs only to those already on the register. A new owner does not receive the dividend, and the market reflects this in the price. For example, if a stock was priced at 500 rubles and the dividend was 40 rubles, it would trade at approximately 460 rubles after the ex-dividend date.

Over time, the price usually returns to its previous level. For some companies, this takes a few weeks; for others, a couple of months. Sometimes, however, the share price never fully recovers; the speed of recovery depends on the company’s financial health, general market conditions, and investor expectations.

For a long-term investor, the gap poses no threat: the dividend has been received, and the price has temporarily dropped by a comparable amount. The situation is different, however, if a stock is purchased right before the ex-dividend date solely for the payout and then sold. While the dividend offsets the price drop, the transaction will likely result in a loss once taxes on the income are taken into account.

How do you choose dividend stocks?

When selecting securities, it is important to consider not only the payout amount but also the stability of the business itself. Here are five criteria to help identify a reliable issuer:

Payout history. Examine the company’s dividend payments over the last 5–7 years. Pay attention to consistency and trends: steady growth in payouts indicates that the business is earning more and is willing to share those earnings with shareholders.
Dividend payout ratio. The optimal range is 30–70% of net profit. This allows the company to pay shareholders while retaining funds for growth. If the ratio exceeds 80–90%, a drop in profits could leave the company with no means to fund the payouts.
Debt burden. A company with high debt levels is forced to use profits to service that debt. A Debt/EBITDA ratio above 2–3x signals a heavy debt load. If the company’s financial health deteriorates, it is highly likely to cut dividends.
Profit trends. If profits are falling while payouts remain constant, the company is funding dividends from reserves or borrowed money. This situation is unsustainable in the long run.
Dividend yield. If a stock’s yield is significantly higher than the industry average, it is worth investigating why. Often, this indicates that the share price has dropped due to business problems, making the dividend-to-price ratio look attractive. In such cases, the high yield does not compensate for the risk of the stock price falling further.

The core of a dividend portfolio should consist of companies that have consistently increased their payouts over many years. These are the companies most likely to continue doing so in the future.

How to build a dividend portfolio?

To generate stable dividend income, it is important to carefully plan which securities to include in your portfolio and in what proportions:

Diversify across industries. Include stocks from various sectors—such as oil and gas, finance, consumer goods, and telecommunications—since each sector reacts differently to economic conditions. A good rule of thumb is to hold securities from 15–20 issuers across 5–7 industries.
Allocate capital evenly. Limit any single security to no more than 5–7% of the portfolio and any single sector to no more than 15%. This allocation strategy protects the portfolio against issues affecting a specific issuer.
Consider payment frequency. Companies pay dividends at different intervals—annually, semi-annually, or quarterly. Selecting securities with staggered ex-dividend dates ensures a steady cash flow throughout the year.
Reinvest. Use the dividends you receive to purchase additional securities. Each reinvested payment begins to generate its own returns, significantly boosting your total yield over time.

Periodically review your portfolio composition. If a company begins to accumulate debt, cuts its dividend payments, or sees its profits decline for several consecutive years, it is a signal to sell those shares and consider a different issuer.