Contents of this article
A dividend is the portion of a company’s profit distributed to shareholders, divided equally per share. When a company makes a profit, it pays out part of that profit to shareholders in proportion to their ownership and retains the rest to reinvest in its other business activities. Whether the company pays a dividend depends on approval by shareholders at the general meeting, based on its current business situation.
Dividends can be paid in two forms: cash or shares. With a cash dividend, shareholders receive a set amount of money from the company in proportion to the number of shares they hold. Otherwise, the company issues additional shares and distributes them to shareholders at a set ratio.
Why companies pay dividends
You contribute capital to a company, and the company shares part of its profit with you as a dividend, in return for the money you put in. Both sides benefit. From an investor’s point of view, dividends also show that the company generates enough profit to pay shareholders, and they give investors a regular cash flow.
However, companies do not always pay dividends. When a company needs to expand aggressively, it retains all of its profit to reinvest. In that case, it may choose not to pay a dividend, or to pay a stock dividend. Paying dividends in shares can also somewhat improve the stock’s market liquidity by increasing the number of shares outstanding.
Dividend metrics
The dividend rate is the dividend amount divided by the share’s par value (set at VND 10,000 in Vietnam). For example, if a company announces a 40% dividend, the investor receives 10,000 * 40% = VND 4,000 per share.
For stock dividends, the dividend rate indicates the number of shares received. For example, if a company pays a 40% stock dividend, you receive 4 additional shares for every 10 shares you hold.
The dividend rate is based on par value, but par value is nominal in most cases. So to calculate returns, investors use the dividend yield, which equals the dividend amount divided by the market price of the share.
For example, a company pays a 40% cash dividend and its shares currently trade at VND 50,000. The dividend is VND 4,000 per share, and the dividend yield is 4,000/50,000 = 8%.
You can easily look up a company’s dividend history on websites such as cafef.vn.
Key dividend dates
A company needs the approval of a majority of shareholders to decide on paying a dividend. Once the dividend plan is approved, the company sets the payment date, notifies the relevant authorities and announces it publicly. For a dividend payment, note the important dates below.
Record date: shares trade continuously on the market, so ownership keeps changing hands. To make paying dividends practical, the company needs to finalise the list of shareholders and their shareholdings on the record date. The company registers this date with the stock exchange and announces it publicly to investors.
Dividend investing
This is a long-term investment strategy for those who genuinely want to hold stocks for many years. You choose stocks with a reasonable dividend yield and a consistent payout record. These are usually companies at a mature stage, which do not need to keep much cash for reinvestment and can pay it out to shareholders instead. This strategy is relatively safe, as it is a bit like a savings deposit but with a higher rate of return.
In the image below, I use MBS Securities’ stock screener as a simple way to screen for companies with high dividend yields.
Happy trading!
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