What is Dividend Stock?

What is Dividend Stock?
Public companies can pay a certain portion of the profits they make in their annual balance sheets as dividends to their shareholders or partners who have a share of their capital. This payment is called dividend. Dividend, one of the returns of the stock, is paid to each shareholder in proportion to the partnership he owns. In this article, you can find answers to questions such as what dividends are, how they are deserved, why companies distribute dividends, what is a dividend stock, how to buy dividend shares, what is the dividend payout ratio.

Dividend or dividend can be defined as the amount decided to be distributed to stockholders and other persons participating in the profit from other sources such as net profit for the period and reserves that may be subject to profit distribution as of the accounting period. Dividend payments can be made in cash, new shares (free capital increase) or a certain amount of cash and a certain percentage of shares, or it can be decided to keep the dividend within the partnership without distributing it.

Shares that regularly pay dividends to their investors and/or regularly increase their dividend yield are called dividend stocks. In general, companies that have become industry leaders, are mature, have expanded their field of activity, are well-known, and have more regular income streams (value stocks) have the potential to distribute more dividends. On the other hand, growth-oriented companies (growth stocks), which strive to increase their value rapidly, focus on increasing their profit margins and therefore their income, so they rarely pay dividends.

Within the scope of Borsa Istanbul, two dividend indices are calculated: BIST Dividend Index and BIST Dividend 25 Index. Within the BIST Dividend Index; There are companies that are traded on the Star Market, Main Market and Sub-Market and have paid cash dividends in the last 3 years as of the valuation date. BIST Dividend 25 Index consists of the 25 stocks in the BIST Dividend Index, which are in the first 2/3 of the ranking from largest to smallest according to their dividend yields as of the valuation day, and whose market value is the largest in average actual circulation.
What is Dividend Yield?

Dividend yield, which is considered an important metric for long-term investors, is generally calculated as the ratio of dividend paid per share to the stock price. Dividend yield, which calculates how much of the share price the dividend received per share corresponds to, more simply shows how many years it takes for the amount invested in the capital, that is, the company, to be fully recovered as dividends. Another alternative dividend yield calculation is the ratio of total paid dividends to the company market value.

There are different approaches to calculating dividend yield as the ratio of dividends paid per share to the stock price. This difference arises from the valuation day, that is, the approaches to the stock price. According to the generally accepted method, the current stock price is used in the dividend yield calculation. In this case, dividend yield may constantly change in parallel with the change in stock price.

In alternative approaches, instead of the current stock price; There are also different applications such as average cost, the last closing price before the dividend is distributed, the stock price at the time the dividend is distributed, and the average price of the stock from the beginning of the year to the period in which the dividend is paid.

Why Do Companies Distribute Dividends?

Dividend, which is one of the returns of the stock and one of the important rights of the shareholders; It can be perceived as an indicator that the company is growing concretely. Since dividend is the part of the net profit for the period distributed to shareholders, the company has the potential to make regular dividend payments as long as profit is realized. However, companies that do not decide to distribute dividends despite making a profit can use the said amount as an additional resource for the growth of the partnership.

On the other hand, dividend payment is also used as an incentive for investors to continue holding the stock of the company in question. Dividend payments, which are a source of passive income for shareholders, have the potential to both increase investor confidence in the company and attract new investors to the company due to possible dividend payments in the future.
How to Earn Dividends?

Companies notify the stock exchange of their decisions regarding dividend distribution at general assembly meetings and announce them to the public. In the announcements, information regarding dividend distribution, including whether dividends will be paid, the date of dividend payment, gross and net dividends, are disclosed. To qualify for dividend payment, the company's stock in question must be in your investment account on the dividend vesting date, that is, the day the dividend will be paid.

Dividend payments can be made in cash or in installments. Dividends are distributed to each shareholder in proportion to the partnership he owns. In other words, the dividend to be paid in cash is calculated by multiplying the net dividend per share previously announced by the company by the number of shares owned.

The dividend amount is transferred to the investment accounts of the shareholders who deserve the dividend payment 2 transaction days after the dividend payments are made.

What is Dividend Payout Ratio?

Dividend payment ratio is the metric that shows what percentage of the total amount distributed by the company as dividend corresponds to the total net profit obtained in the relevant period. Dividend payment ratio is calculated as the ratio of the total distributed net gross dividend amount to the net profit for the period.

How Are Dividends Distributed?

In order to distribute dividends to shareholders and other persons participating in the profit, the company must complete the relevant operating period with a profit. In this case, first the company's board of directors submits its proposal for dividend distribution. This proposal is then decided at the company's general assembly meeting. In other words, companies distribute their profits to their shareholders by the decision of the general assembly, within the framework of the dividend distribution policies to be determined by the general assemblies and in accordance with the relevant legislation.

On the other hand, in general, on the first trading day after dividend distribution, the price of the stock may decrease by the amount of gross dividend distributed per share. This is due to an outflow of money from the company, even if it is due to dividend payments. However, this situation may be temporary, as the dividend payment may increase both investors' confidence in the company and their expectations for possible dividend distribution in the future.

However, if the company realizes a loss in the relevant operating period, dividend payments are not made to the shareholders and other persons participating in the profit.