Investment Questions From A Novice

[malcolminthemiddle]

A couple of questions to you investment gurus out there from a novice investor developing a portfolio for retirement in Thailand.

1. Is there a minimum period one must hold a stock before being entitled to a dividend or is it possible to buy and sell a stock either side of a dividend issue.

2. Are dividends paid out gross or net of tax?

3. If the stock is bought online how does the dividend get credited to the investor.

Talking about UK and US stocks here.

Thanks in advance.

[jbaldwin]

This reply relates to the UK position. US shares might be different.

1) Dividends are paid to any shareholder who owns share on the "Ex-Div" day, normally about six`weeks before payment date. There is no minimum holding period. The share price will fall by an amount equivilent to the divident on the ex-div date to reflect the fact that the shares no longer have the right to the dividend payment.

2) Remember that dividends are paid out of company profits that have already been subject to corporation tax. If dividends were subject to normal income tax then the profits would be double taxed. For a zero, 10% or 20% tax payer no additional income tax is payable (and no tax can be reclaimed)

3) There are two optionss. If you open a nominee account then the shares will be registered in the name of the broker and dividends will be paid to your brokers account. If you have an individual CREST account then the share will be registered in your name and dividends will be paid by cheque unless you complete a form to have them paid directly to your bank account.

[malcolminthemiddle]

This reply relates to the UK position. US shares might be different.

1) Dividends are paid to any shareholder who owns share on the "Ex-Div" day, normally about six`weeks before payment date. There is no minimum holding period. The share price will fall by an amount equivilent to the divident on the ex-div date to reflect the fact that the shares no longer have the right to the dividend payment.

2) Remember that dividends are paid out of company profits that have already been subject to corporation tax. If dividends were subject to normal income tax then the profits would be double taxed. For a zero, 10% or 20% tax payer no additional income tax is payable (and no tax can be reclaimed)

3) There are two optionss. If you open a nominee account then the shares will be registered in the name of the broker and dividends will be paid to your brokers account. If you have an individual CREST account then the share will be registered in your name and dividends will be paid by cheque unless you complete a form to have them paid directly to your bank account.

Thanks for replying to my questions and thanks your knowledgeable answer.

MITM

[malcolminthemiddle]

Okay since my last post I've done some research and found this web site which gives extensive information on dividends.

http://www.dividendinvestor.co.uk/

So my next question is what are the pitfalls? For example:

1. If a dividend has been declared can it be rescinded?

2. Assuming the share price drops once the dividend is paid out the unknown is how long the share price will take to return to the price when the share was purchased.

Based on latest information I have calculated the average gross return for every GBP 8,000 invested over a period of approx 6 weeks is approx GBP 300. Does this sound about right?

[tingtong]

today you buy a stock for 10$/share. tomorrow they declair dividend, 1$/share. so, the price after the cut-off day( where they decide to close reg. for dividend) immidiately falls 1$, to 9$.

since you will recieve 1$, your investment have the same value, as you started, teorically( divident taxable in most places).

so, when will go back to your purchase price again?

good question. might ask a fortune teller for the answer

Edited November 17, 2007 by tingtong

[malcolminthemiddle]

today you buy a stock for 10$/share. tomorrow they declair dividend, 1$/share. so, the price after the cut-off day( where they decide to close reg. for dividend) immidiately falls 1$, to 9$.

since you will recieve 1$, your investment have the same value, as you started, teorically( divident taxable in most places).

so, when will go back to your purchase price again?

good question. might ask a fortune teller for the answer

If I'm reading the data correctly you can buy certain stock after the dividend has been declared. So at the time of purchase the effect of the dividend on the stock price is already factored in. There is a period of time between the div declaration and ex-div date which varies between different stock, so another unknown is the fluctuation in the stock price between these two dates.

[tingtong]

right, there is an unknown fluctuation. matter of fact, everyday the fluctuation is unkown

let say your company has a positive earning surprice, and declair a higher than expected dividend...chances are good the share price will rose.

and what if your company decide to expand in the current situation, and reinvest the profit insteed pay dividend? as most of the companys still in growth will do.

all in all, i found that to concentrate to the current price is mot important, and think divident as an extra bonus if i holding longer period ( only holding if the price is right).

fast exp: stock price is down 10% in your period, but pays 5% dividend....you still have less money after you recieve it.