There are two ways of making money in the Philippine stock market.
Capital appreciation, or the price of the stock getting higher, is the common way of making money in stocks investing. This should be obvious given the fact that stocks continuously change its price every single day, which means more opportunities to get out of it.
But dividends is also a great machine for squeezing the most out of your money’s potential.
In fact, receiving dividends can be a thrilling experience for new investors.
When I just started, I remember giant companies giving me few bucks as dividends. While they were pretty small amounts (less than a hundred pesos), at least they’re all aware that I’m one of their part-owners HAHA.
But as my positions become bigger, I started welcoming dividends from several hundreds to few thousands. Oftentimes, I get surprised once I notice that my cash available has increased in value because of this addition (in the case of cash dividends). And I really like that idea of money coming to you in unexpected ways, a clear example of earning passive income through paper assets such as investments.
So how do you avail of a dividend?
Whenever a dividend is announced, there’s always three dates mentioned in it.
Look for them to aid you in your decision of buying stocks and availing of a desired dividend.
RECORD DATE – date where stockholders to be entitled of dividends are identified and recorded. For the purpose of availing the dividend, you can ignore this one.
EX-DATE – three working days before the record date. EX means bye-bye dividends. This starts the three-day process period, during which if you buy you’re NOT entitled to the dividend. The three days period is needed because of the T+3 rule – three days is needed after the transaction day before the stock you bought be placed under your account.
While you can already see it in your portfolio after the order is executed, the records that will be used in identifying the entitled stockholders will only be updated after these three days.
PAYMENT DATE – date where dividends will be finally paid to stockholders. Yahoo!
Depending on your broker, you may see this payment credited to your portfolio on or after the payment date.
To avail of a desired dividend, make sure you have the stock in your portfolio one day before the EX-DATE.
Buying the stock starting on the EX-DATE won’t entitle you to that dividend.
You can check all the dividend declaration of all companies in the PSE website or through your broker.
Income vs Growth Investors
For some investors, dividend is one of their main considerations when choosing what companies to buy.
This type of investors who look at dividends as regular income are specifically called income investors. They are contrasted to growth investors who are primarily after fast-growing companies that prefer to re-invest their earnings rather than sharing it with all the stakeholders as dividends. These growth-investors are then those who are after capital appreciation as preferred way of growing their money in the stock market.
But do you know that there are several implications when receiving dividends from your company in the Philippine Stock Exchange?
Below is a crucial one from Investopedia.com regarding what happens to the price of a stock on its ex-dividend date.
When a dividend is paid, several things can happen. The first of these is what happens to the price of the security and various items tied to it.
On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. For most dividends this is usually not observed amidst the up and down movement of a normal day’s trading. However, this becomes easily apparent on the ex-dividend dates for larger dividends, such as the $3 payment made by Microsoft in the fall of 2004, which caused shares to fall from $29.97 to $27.34.
The reason for the adjustment is that the amount paid out in dividends no longer belongs to the company and this is reflected by a reduction in the company’s market cap. Instead, it belongs to the individual shareholders. For those purchasing shares after the ex-dividend date, they no longer have a claim to the dividend, so the exchange adjusts the price downward to reflect this fact.
So for stock dividends, you can calculate the opening price of these companies giving these dividends when the ex-dividend date comes.
To get what a stock price will be on ex-date, you can use this formula:
Thus, for a 50% dividend, stock price’s opening price on EX-date will be adjusted to 67% of its last market price (price the trading day before ex-date).
Your total number of shares on the other hand will then be
Total Number of shares after dividend = Original Number of shares x (1+stock div rate).
As a resuly, stock dividend will automatically result to a lower stock price on ex-date.
And in the Philippine stock market, this is adjusted by the Philippine Stock Exchange.
So stop getting shocked or worried if you see stocks’ price went down on their ex-date. It’s a normal consequence of the dividend-giving process.
Some Frequently-asked Questions:
Q: How will I know that I received my dividends?
A: You’ll receive an email notification from your online broker about the dividend you’re entitled to. See sample below.
Q: When will I actually see the cash proceeds (or additional stocks) added to my account?
A: If it’s cash dividends, you can see the added cash in your account ledger on or few days after the payment date.
If it is stock dividends, you’ll see the added shares in your portfolio on or few days after the payment date.
Q: How can I make sure that I’m entitled to dividends?
A: It’s when you hold the stocks one day BEFORE the EX-DATE. So even if you sell on the EX-DATE, you’re still entitled to it.
Now devise your dividend-related strategy!
Have fun investing!
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