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Investing In Dividend Stocks

written by: Brian Nelson•edited by: Rebecca Scudder•updated: 3/19/2009

Have a renewed interest in dividends? You aren't alone. Investing in dividend stocks can be a great way to diversify a portfolio and generate income at the same time.

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    What Is a Dividend Stock

    Although it can be easy to forget, a share of stock is actually partial ownership in a corporation. As such, stock ownership entitles the owner to certain rights like voting on members for the board of directors and on various other issues, usually by proxy.

    Dividends are a way to return capital (profits) to shareholders. While the shareholder gets virtually no say in whether or not there is a dividend or in how much it will be, they are entitled to their fair share of any dividend that is declared.

    A dividend stock then is one which pays a dividend.

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    How To Invest In Dividend Stocks

    Buying a dividend stock is no different than buying any other stock. Log-in to your online trading account at eTrade, Fidelity, Schwab, or another brokerage and enter an order. Or, if you prefer, call your broker and give him the order. Either way, there are some basics you should know before becoming a dividend stock investor.

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    Dividend Stock Glossary

    When it comes to dividends, there are a couple of terms that get thrown around. They may sound complicated at first, but are actually relatively easy to comprehend once you understand the mechanics of paying a dividend to shareholders.

    When a company decides to issue a dividend, it announces that a dividend will be paid, how much the dividend will be, and who it will be paid to. This announcement is referred to as "declaring" a dividend. The date on which the announcement is made, is called the "declaration date." Once a company declares a dividend, it becomes a legal obligation of the company.

    There are three critical dates involved in every dividend payment. The first is the date of record, or record date, the second is the ex-dividend date which is sometimes referred to as the ex-div date. And, the third is the date on which the dividend will be paid, sometimes referred to as the div-date.

    Don’t worry, it sounds worse than it is.

    Imagine a situation in which a company declares a dividend on March 1st of thirty-five cents per share to be paid on April 20th to shareholders of record on April 2nd.

    In this scenario, the declaration date is March 1st. The Record date is April 2nd, and the dividend date is April 2nd. Easy, right?

    But, what if you bought the stock at noon on April 2nd? Do you get the dividend, or does the person you bought the stock from.

    To keep just this sort of issue from arising, the stock exchanges use the ex-dividend date. The New York Stock Exchange sets the ex-div date four days before the record date, as do the other exchanges. After this date, the stock trades without the dividend included, or ex-dividend.

    However, this could potentially lead to a problem where trading in a particular stock slowed to a crawl as the record date approached. After all, why sell your stock when holding it one more day would result in you getting the dividend.

    This is avoided by subtracting the dividend amount from the price of the stock on the ex-div date. For example, a company trading at $50.00 per share and paying a $1.00 dividend would have its price set at $49.00 per share when the stock goes ex-div. Now, there is no reason to delay trading your stock since you will lose the equivalent value in share price that you will gain in dividend payout.

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    Getting The Dividend

    With all of these concepts in mind, you can see that in order to get the dividend of any stock, you must own the shares by the ex-dividend date (not the record date). If you purchase the shares between the ex-div date and the record date you will get the dividend but lose the same value from your share price.

    If you see the potential to benefit from this knowledge, you are right. Stay tuned for our upcoming dividend stock investing guide.