Dividends are earnings (parts of a company’s profit) that are distributed among its shareholders.
They are distributed in cash. Stocks that pay good dividends are favored by more conservative investors.
There are several types of earnings:
- Interest on Equity;
- Subscription Rights.
In this article, we’ll talk more about the most popular type of earnings: dividends.
This topic is one of the most researched topics when it comes to living on income , which is one of the greatest desires of those who are looking for financial independence .
In summary: dividends are earnings paid by publicly traded companies. This distribution of part of the profit of a certain company is what many shareholders seek.
Most companies that are considered safe offer dividends as a way to remunerate their shareholders.
As the stock price of these stable companies does not normally vary much, they offer this differential to attract and retain new investors.
In this article you will:
- Learn what dividends are
- Understand how dividend investing works
- Know what types of dividends exist
- To know if it is possible to live on income
- Learn how to calculate dividends
- Know the dividend schedule
- Know how to build the best dividend portfolio of 2019
- Understand dividend investment rates
If you have any questions, leave a comment at the bottom of the page.
What Are Dividends?
A dividend is a part of the profit for a particular company
Dividends are a small portion of the company’s profit, distributed to shareholders as a form of remuneration.
It is natural that the partners of a company receive part of the profit. In large publicly traded companies, like all of the Stock Exchange, this distribution of part of the net profit happens through dividends .
This term is directly linked to the Stock Exchange (B3) and the organizations listed on the stock market.
All B3 companies must share at least 25% of their profits with their holders.
So, the dividend can be thought of as being part of a big cake that a certain company produces.
And the division of this cake happens according to the amount of papers you have. So the more shares you have, the bigger your share will be.
Companies can also choose to share all of their profits with their shareholders or keep some percentage for themselves.
Such profit can also be distributed through Interest on Equity (JCP) .
This is a different way of distributing a company’s profits among its shareholders. The main difference is that this type of income is considered an expense for the company.
This is because the JCP is discounted before net income, which guarantees a tax benefit.
How do companies pay dividends?
For a company to pay dividends, it must follow a few steps.
The first is to obtain approval from its Board of Directors, an internal body that oversees the organization’s activities.
There, its members meet and decide on the proposal, assessing whether there is enough profit to distribute a portion to shareholders.
That done, the next step is to file the decision with the Securities and Exchange Commission (CVM), linked to the Central Bank.
The objective is to publicly inform the decision to pay the dividends and also the amounts and dates for that to happen.
Once all steps are taken, payment remains: dividends must be credited to shareholders’ accounts.
How Dividend Investment Works
The payment of dividends can take place on a monthly, quarterly, semi-annual or annual basis.
In addition, some institutions increase the values of the distribution of their profits over time.
For example, a particular organization may offer dividends of 25% now and increase it the following year to 40%.
This is not a rule, but usually companies that are reputed to pay increasing dividends do not usually disappoint their shareholders.
When a company pays dividends, it probably has a more solid corporate governance, where cash flow is predictable. Companies that are still growing, need to invest and expand faster.
Thus, they usually do not distribute dividends during this period.
When they become good dividend payers, it ends up attracting more and more investors.
There are some names that every shareholder must know to benefit in the best way possible with dividends. Are they:
The registration date is the day that companies use to determine who their shareholders are.
This date must be included in the organization’s accounts so that its investors can receive their share of the profits.
On this day, it is also defined who will receive proxies, financial reports and other information that is important for the dividend distribution process.
It is on the declaration date that the dividends are announced by the Board of Directors.
On this day, the dividend amount, the registration date and the payment date are communicated.
After such disclosure, the company in question has a legal obligation to share its profits.
The ex-dividend arises when new shareholders are no longer entitled to receive the declared dividend.
There is a day, known as “data-ex”, where ex-dividends are announced. So, if a shareholder buys a share after that date, the share seller receives the share of the profit.
The ex-date usually happens two business days before the registration date.
But this can vary in payments that are not made in cash.
Dividend Coverage Ratio
The dividend coverage ratio is the relationship between an organization’s net income and the dividends paid to its investors.
Thus, shareholders are able to more easily measure the company’s ability to pay for its dividends.
Such an index is calculated by dividing the total profit by the dividend value of a given share.
Dividend Reinvestment Plans (PRD)
The dividend reinvestment plan is a plan made by a certain company, in order to allow its shareholders to reinvest the dividends paid in cash automatically.
With that, such reinvestment is scheduled to happen on the day of part of the company’s profit sharing.
This can end up being a great opportunity for shareholders looking to take advantage of the organization’s capitalization potential .
This is because the PRD manager stops receiving its dividend on the agreed date, reversing this amount in additional stock purchases.
Usually, companies allow this automatic purchase to be made with discounts and without commissions.
Types of Dividends and Earnings
All earnings are paid in proportion to the number of shares
In most situations, investors have no influence on a company’s profit.
But even so, any shareholder can use organizations’ indexes and indicators to identify good payers , for example.
See the types of earnings below:
The payment of dividends is common on the stock exchange. When you buy a paper, you earn the right to receive part of a company’s net profit.
The payment period is defined by the company’s board of directors. You can decide to cash out or reinvest in more stocks . This money goes into your account at the broker.
Companies that distribute more earnings have a higher dividend yield .
This is the Dividend Yield . It is an index that measures the dividend yield, over a period of time, in relation to its share price.
This value is calculated from this equation:
Dividends paid per share / Current share price = Dividend Yield
This indicator is important for you to compare the profitability of dividends between companies.
The payment of a benefit can also be made with additional shares for the shareholder.
As a result, the number of shares received varies according to the number of shares that the investor already owns.
Extraordinary special dividend
A special dividend is an extra payment that companies make to their investors.
This can happen for a number of reasons, such as an unexpected gain or a sudden increase in the organization’s cash.
This profit happens when the company issues more shares. You have the right to buy them before the market, keeping the same proportion of shares.
Sometimes, these shares are available for below market value.
If you receive subscription rights, there is a deadline to choose whether to sell the right or subscribe.
Pay attention to the market price: if the stock is cheaper on the market, you should not use your subscription right.
Interest on Equity
As already explained, it is very similar for the investor to common dividends. The difference is in the accounting of the company that pays the earnings.
Is It Possible to Live on Dividends? Understand What Yield
You can only live on dividends according to your capital and of course, your lifestyle
The answer to that question varies from person to person.
Everything will depend on how much you think it is necessary to receive monthly, in order to be able to pay your bills and of course: how much you have to apply.
In addition, it is essential that you diversify your investments . This is so that your risks can be minimized.
As the saying goes: “Don’t put all your eggs in one basket”.
So, if you plan to live off dividends , it is essential that you choose companies from different sectors and know each one very well.
You also need to be realistic about how often you need to receive your payments.
At Rico, we set up a dividend portfolio.
For example, our Dividend Portfolio 8+ is made up of stocks with excellent returns.
See the recommended actions for August 2019:
Table of the Dividend Portfolio 8+ for 08/21/2019
How to Calculate Dividends
To calculate the value of a dividend, it is necessary to know in depth the company
As it is part of a company’s net profit , what determines the amount of dividends distributed to investors is the financial result presented by the organization.
Net profit is the entire amount of cash that is “left over” from the operations of a company, after deducting all applicable discounts.
This value can be easily found in the reports that are made available to investors.
You can also find it on the Stock Exchange website itself .
In addition, this is one of the few determining factors for this payment to occur. Because if the company does not profit , its shareholders will have nothing to receive.
To avoid this type of situation, some companies create a kind of “profit reserve”.
Dividends are usually calculated as a value per share. That is, each investor receives an amount based on the number of shares he holds.
For example, if you own 200 Petrobras shares and it decides to pay R $ 5 per share of its annual dividend, your return will be $ 1000 (200 shares x R $ 5 per share).
This value can also be calculated against a predefined percentage of the current share value.
For example, let’s say that a company has announced the distribution of a 3% dividend yield. As a result, the amount received by its shareholders will be 3% of the current share price.
So, to know the exact amount to be received, just multiply that percentage by the number of shares that the investor owns.
Imagine that the price at which Vale’s shares are being traded is R $ 60. Suppose, too, that it is offering a 2% dividend.
As a result, the dividend amount would be R $ 1.20 per share (2% of the dividend x R $ 60 per share).
Comparing information is essential for a successful investment
The dividend agenda is a set of forecasts.
It serves for a shareholder to be able to follow dividend paying companies.
A dividend schedule usually has the following information already explained:
- Ex Date
- Payment Date
Such information is usually updated daily. Therefore, it is essential that shareholders analyze it periodically.
How to Build the Best Dividend Portfolio in 2019
Having a good strategy brings great results
There is no cake recipe or magic formula to build a great dividend portfolio.
But, regardless of anything, knowing how to choose the right companies to compose your portfolio is essential.
If you want to have great results in the stock market, the four steps listed below are sure to help you.
Step 1: Analyze the company
When choosing which stock to invest in order to receive good dividends, it is important to analyze in detail the company of which you wish to become a partner.
Yes, because investing in shares implies exactly that: acquiring a part of the company’s property.
So, it is not enough to just choose stocks with very high dividends.
The dividend yield is calculated based on dividing the expected dividend value by the share price.
This means that a company whose share is quoted at a very low value, naturally, will show proportionally higher dividends.
Step 2 – Know your payment history
Another important step when choosing stocks for the portfolio is to analyze the company’s dividend payment history.
In this assessment, consider the results of the last five years, at least.
If a company pays good dividends in one year and not in the next, it may not be a good deed for the portfolio.
Step 3 – Pay attention to payment dates
It is necessary to be aware of the dates on which companies pay dividends.
Thus, it will be easier to assemble a good dividend portfolio according to your needs.
Step 4 – Keep your portfolio focused in the long run
Dividend portfolios should be planned with a long-term focus.
It is not interesting that investors are concerned about short-term fluctuations. After all, the focus is on receiving dividends.
In order to carry out this analysis in the best possible way, you will need to take into account some of the main indicators of actions:
- Dividend Yield : indicator that measures the profitability of dividends in relation to the stock price of a certain company
- Dividend Payout : the percentage of the profit that will be paid to investors.
Step 5 – Diversify wisely
Diversification is a very important factor in any portfolio, but that does not eliminate the need for caution and planning.
To create a dividend portfolio, the ideal is to choose between five and eight assets.
This will allow you to study a lot about each stock that will make up the portfolio.
Step 6 – Choose solid companies with good cash generation
Another important step is to choose companies consolidated in the market and with good cash generation.
Companies that are usually good dividend payers are usually companies that do not need to pay large amounts of money to make their investments, precisely because their processes have already been developed.
Step 7: Open a Rico account
Step 7 is the icing on the cake.
With a Rico account, you will be able to trade on the Stock Exchange. Rico was voted one of the best brokers to invest in stocks .
To enjoy the best value on the market and other benefits, you just need to open your account right now.
Step 8 – Be sure to learn how to trade on the stock exchange
It is essential to learn more about how to trade on the stock exchange strategically, thinking long term.
Do not enter this market with an immediate attitude. The main strategy of every investor looking for dividends is to know how to evaluate companies and buy only high quality papers.
Therefore, without the proper knowledge, it is not possible to acquire papers from good companies.
You should also become familiar with Rico’s Home Broker . Because this is where you will buy and sell your shares online, conveniently and quickly.
Step 9 – Reinvest the dividends
It is in this last step that you accelerate your earnings so that you can eventually live off your income.
Reinvesting dividends by buying more shares puts you in a totally positive cycle of enrichment.
Basically, this step is a repeat of what you have done so far. Only that the investment will be made with the income received.
Example of investment in dividends
Those who want to invest in dividends have at their disposal several options for companies that pay good dividends, such as Itaúsa, Engie and Banco Itaú.
In addition, there is a possibility to invest in dividend funds.
An example is DIVO11.
The fund traded at B3 which aims to closely monitor the performance of IDIV, which is the Dividend Index of the Brazilian stock exchange.
DIVO11 has a portfolio based on IDIV, therefore, it performs according to the stock portfolio of companies with the highest dividend yelds, according to the IDIV index.
This fund has some interesting features, especially for beginning investors.
He has professional management and, therefore, there is no need to spend a lot of time studying company by company when setting up his investment portfolio in dividends.
In addition, it also offers diversification.
Thus, the investor now has money invested in various actions, which guarantees better risk management .
Finally, money from dividends is automatically reinvested by the fund, which means that it is constantly yielding.
Dividend Investment Rates
There are some fees that are charged in this type of business
It is necessary that you know all the costs involved to always make the best decision when investing in dividends.
The brokerage fee is the amount paid to the broker so that it can carry out a transaction with the Stock Exchange.
Such value can be fixed or variable and the broker defines this.
Normally, when the home broker is used, this fee is fixed. But when transactions are carried out by the broker’s trading desk, this value can be variable.
You can consult Rico’s brokerage values on this website.
Service Tax (ISS)
The Service Tax is levied on the value of the brokerage fee. It varies between 2% and 5% depending on the location of the brokerage house.
But some brokers do not charge the ISS because it is already included in the price of the brokerage fee.
Custody Maintenance Fee
The custody maintenance fee covers the expenses that the broker has with the Share Chamber to keep its shares.
It is a fixed fee that is charged by most brokers on a monthly basis. In addition, the Custody Maintenance Fee is only charged when assets are in custody in the reference month.
Remember that Rico does not charge custody fees.
Custody Value Fee
The fee on the value in custody is also charged by B3 (formerly BM & FBovespa), in order to hold its shares.
It is a variable rate and is charged on a monthly basis according to open positions on the last business day of the month according to the table below:
BOVESPA table for charging the Custody Value Rate
Fees and Settlement Fee
The Fees and Settlement Fee are charged by the Share Chamber and B3.
These values guarantee the registration of all orders that are sent by brokers.
They are charged based on a fixed percentage of the total price that was negotiated. They also vary according to the type of operation carried out (Day Trade and Normal).
Table for charging Emoluments and Settlement
Income Tax (IR)
Income tax (IR) is levied only on individuals who sell shares above R $ 20,000.00 per month.
If this is the case, you will be charged 15% income tax on your profit less costs.
But if you perform a Day Trade operation , the income tax charged on the profit earned minus the costs of the operation will be 20% .
Income tax is calculated on a monthly basis and must be paid by the last business day of the month.
Dividends are payments that companies make to their shareholders for part of their net income.
Many people manage to live on income only with the dividends received.
To reach this point, you need to have a diversified investment portfolio and, of course, a certain amount of applied capital.
Keep learning about investments with these other articles on our blog:
- How to Live on the Stock Exchange: 13 Killing Tips
- How and When to Buy and Sell Shares on the Stock Exchange?
- Investment Diversification Guide (Example of Ideal Portfolio)
But of course, there is not just an investment strategy. What exists is one that best suits your financial goals.
Whatever your strategy with dividends, always prefer solid companies in the market.