Dividend
A cash payment distributed to shareholders out of company profits.
Also called: dividend yield · ex-dividend
Written by Javier Sánchez Ros
In plain language
Dividends are usually paid quarterly. The dividend yield expresses the annual payment as a percentage of the current share price.
On the ex-dividend date the share price typically drops by roughly the dividend amount. The value is transferred, not created.
A yield that looks unusually high is often the result of a falling share price rather than a generous payout, and can signal a dividend at risk of being cut.
The formula
Dividend Yield
Annual Dividend Per Share ÷ Share Price × 100
Worked through
A $0.94 dividend and a stop 80 cents below
- Close before ex-date
- $61.40
- Dividend per share
- $0.94
- Opens around
- $60.46
- Stop at $60.60
- triggered
Nothing went wrong with the company and nothing went wrong with the thesis. On the ex-dividend date the stock opens lower by roughly the dividend, because a buyer from that morning no longer receives it — the value left the share and went to the holders of record.
On a chart this is indistinguishable from a gap down through support, and it takes out a stop placed just underneath. The trader is out of a working position, holds a $0.94 dividend they were not trading for, and has recorded a loss caused by a scheduled accounting event.
The drop is not always exactly the dividend — tax treatment and ordinary trading move it around — but it is close enough to matter and it is entirely predictable in advance.
The habit is to check the ex-dividend date before placing a stop on any dividend payer, the same way one checks the earnings date. Both are calendar events that act on price without saying anything about the trade.
Why it matters
The ex-dividend drop can look like a breakdown on a chart and can trigger stops that were placed without accounting for it.
Common mistakes
- Reading the ex-dividend price drop as a technical breakdown.
- Chasing high yields without asking why the price fell.
- Holding a short position through an ex-dividend date, where the dividend is owed by the short seller.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
A unit of ownership in a company.
A company’s share price divided by its earnings per share.
A jump between one period’s close and the next period’s open with no trading in between.
A position that profits when the price falls.
A company’s net profit divided by its number of outstanding shares.