Is it a bonus? Is it a scam? Do you even know what it is? Time to talk dividends! Dividends are an investment strategy that financial analysts encourage or strongly discourage, but like all other investing, it’s about the approach.
Jumping into a company just because it has dividends is the same level of sketchy as jumping into a river in Florida thinking it’s only water; not very thought out. As we all know, Florida is infamous for alligators everywhere. Maybe look around for a moment, then when you’re in the clear, experience every bit of satisfaction. Educating yourself on dividends can help you avoid the alligators, aka sneaky companies, so keep reading to learn more!
What are dividends?
What are dividends? Dividends are payments from companies to shareholders from corporate profits.
Another way to put it is if a company makes a profit, the board of directors can vote on giving a percentage to shareholders as a thank-you for investing in the business.
Not every company pays dividends, so it can be an appealing quality that excites investors! However, a company could be covering-up for poor financial strength by offering dividends to shareholders.
If you’re interested in this strategy, the timing of an investment is crucial to receive a dividend.
- Declaration Date: The day dividends are announced to shareholders.
- Record Date: The company determines eligible shareholders, basically the cutoff date. If you’re not in the company’s books as a shareholder, then you will not receive dividends.
- Ex-Dividend date: Like the record date, this determines which shareholders are entitled to a dividend.
- Payment date: The day the dividend is paid to shareholders.
An Analogy of Dividends
Let’s jump into another lemonade stand analogy to let this strategy stew. Barney has sold his lemonade stands, and a new owner exists. Her name is Jennifer.
Jennifer purchases the lemonade stand for $500 from Barney. Her parents (Bill Gates-inspired) invested $100 to get her business going.
In the first week, she makes $70 on Monday, $100 on Tuesday, $85 on Wednesday, $105 on Thursday, and $95 on Friday. For a total of $455 the whole week, she killed it.
After paying for more supplies, her own salary, etc. Jennifer made $100 in profit. She decides to give 20% of that profit (a dividend) to her parents. Her parents, as shareholders, receive $20 from Jennifer. They must be proud!
If receiving a dividend makes you want to run straight into the market, just remember, everything can be manipulated. Check out this article on what you should consider before jumping into alligator-infested water.
How to Use Dividends in Equities Lab
Now that you know the value of dividends, it’s time to start using the designated dividend screeners in Equities Lab to see some results.
If you use your explorer tab, type in Dividend, then under the featured stock screeners, the name “Supposedly Boring Dividend Screener” will pop up; now click on it. I went with this one because the title was too enticing.
Below is the description of the dividend screener.
That sounds like a pretty decent screener to me! If you navigate to the Editor tab, you’ll see the formula displayed below.
How does it perform? After being tested over a 10-year period, which helps identify if it’s a good strategy, the “Supposedly Boring Dividend Screener” beats the market! The below image shows it’s not a crazy amount, but still good!
Looking at the below stats, they show a conservative success! Not out of this world Tiny Titan success, but you know it’s not overly sensitive to the market and will most likely beat it.
The below graph shows that for 6 years, there was a clear winner with the screener.
If you maneuver over to the watchlist, sort by return, then size by balance, a watchlist will appear and visualizes how the strategy wins over 60% of the time, which is the criteria for a green flag.
Equities Lab will state it, again and again, don’t fall headfirst into a strategy. Maybe dip a toe, then a foot, and continue exploring with due diligence. The above screener performed well, but keep exploring! Only getting caught up in companies that pay dividends simply because they pay dividends could lead you down a rabbit hole (more like an alligator hole). So continue backtesting for better living, refining your formulas, and using data that makes a difference.