Dividend Stock Investing Quiz

Dividend stock investing has once again become a hot topic with the investing public. After long stints of avaricious performance chasing in the late 1990s and mid 2000s that ultimately turned south, investors now realize that the gains you make in a stock aren’t just via the share price. In fact, the dividends and income paid out by a stock can really take care of investors, especially during times where volatile price swings are the norm. And while it’s true that many companies either lowered or halted dividend payouts altogether in response to the “Great Recession,” a huge number of fantastic dividend stocks have returned to paying out very attractive income.

If you’re looking to take advantage of this new, old trend toward buying companies with sound dividend payouts, then there a few things you need to know.

The following 10 questions will test your knowledge, and hopefully, teach you a thing or two about how to make the most of your dividend stock investing and income-investing efforts.

A dividend is basically just a payment a company makes to its shareholders that allows the shareholders to participate in the profits of the company. But before a company can pay a dividend, that dividend must be declared by its board of directors.

Which of the following dates apply to the process of a company paying dividends?

A) Declaration date

B) Date of record

C) Ex-dividend date

D) Payment date

E) All of the above

F) None of the above

.

True or False? Dividends enjoy favorable tax treatment and are only taxed at a rate of 15% at the federal level.

The dividend payout ratio is:

A) Used to identify the percentage of earnings per common share allocated to paying cash dividends.

B) An indicator used to determine how well earnings support a dividend payment.

C) Is calculated by dividing the amount of the dividends paid by the earnings per share over a given time frame.

D) All of the above.

E) None of the above.

True of False? Dividend yield is calculated by taking the amount of dividends paid in a single quarter and dividing that by the stock price.

The following currently are true about dividends and their tax treatment:

A) They are taxed at a person’s individual tax rate.

B) They are taxed at the same rate as the long-term capital gains tax rate.

C) They are considered double taxed, because a corporation has already paid taxes on the profit they’ve earned before they payout dividends.

D) They are taxed at the same rate as short-term capital gains.

E) Both A and D.

F) Both B and C.

True of False? Historically, stocks in the S&P 500 with lowest dividend yield actually outperformed stocks with the highest dividend yield.

One strategy for buying blue-chip dividend stocks is called the “Dogs of the Dow.” The strategy…

A) Consists of buying the 10 Dow Jones Industrial Average stocks with the lowest dividend yield at the beginning of each year.

B) Consists of buying the 10 Dow Jones Industrial Average stocks with the highest dividend yield at the beginning of the year.

C) Outperformed both the S&P 500 index and the Dow in the bear market of 2008.

D) Underperformed both the S&P 500 index and the Dow in the bull market of 2009.

E) Both A and C.

F) Both B and D.

True of False? Dividend Reinvestment Plans, or DRIPs, are a way for shareholders to reinvest variable amounts in a company over a long time frame.

The dividend discount model is:

A) A method of valuing the price of a stock by using predicted dividends and discounting them back to present value.

B) Is calculated by dividing the dividend per share by the discount rate minus the dividend growth rate.

C) Is thought of as an important reflection of a company’s value.

D) All of the above.

E) None of the above.

True of False? According to Standard & Poor’s, 2009 was the worst year on record for dividend stocks.

Question 1: E – The declaration date is the day the board announces its intent to pay a dividend, while the date of record, also known as the ex-dividend date, is the day that stockholders of record are entitled to the upcoming dividend payment. The payment date is the date the dividend will actually be paid out to shareholders of record.

Question 2: True – Dividends enjoy favorable tax treatment, and for the remainder of 2010, they are only taxed at a rate of 15% at the federal level. However, this favorable tax treatment on so-called qualified dividends is over in 2011. Beginning next year, dividends will be taxed at the individual income rate.

Question 3: D – The dividend payout ratio is used to identify the percentage of earnings per common share allocated to paying cash dividends. It’s also commonly used as an indication of how well a companies earnings support that dividend payment. The ratio is calculated by dividing the amount of the dividends paid by the earnings per share over a given time frame. The result is expressed as a percentage.

Question 4: False – Dividend yield is calculated by taking the total amount of dividends paid over the course of an entire year (not just one quarter) and dividing that number by the stock’s price. For example, if a stock pays out $4 in dividends over the course of a year and trades at $40, then it has a dividend yield of 10%.

Question 5: F – Dividends are currently taxed at the same rate as long-term capital gains; however, that the law is slated to change in 2011, when the dividend tax reverts back to the individual tax rate. Dividends are considered a form of double taxation, as a corporation pays taxes on the money it’s earned before they distribute the money to shareholders in the form of dividends.

Question 6: False – According to famed financial author Jeremy Siegel, the highest yielding dividend payers in the S&P 500 Index have outperformed the lowest yielding dividend payers going back to 1957. Siegel’s research indicates that if an investor had put $1,000 in a portfolio of the 100 highest-yielding stocks on January 1, 1957, by December 1, 2009, he would have accumulated more than $450,000 (assuming all dividends were reinvested). That’s a hefty annualized return of 12.5%. That same $1,000 invested in the 100 lowest-yielding stocks returned only 8.8% per year.

Question 7: F – The Dogs of the Dow is a strategy that calls for buying the 10 Dow Jones Industrial Average stocks with the highest dividend yield at the beginning of the year. The theory underperformed the bear market of 2008, falling 38.8%, compared with the 37% and 31.9% declines in the S&P and Dow, respectively. The theory also underperformed the major indices in the bull market of 2009, delivering a positive total return of just 17.8%, compared with 26.5% gain in the S&P and a 22.7% gain for the Dow.

Question 8: True – DRIPs allow shareholders to reinvest variable amounts in a company over the life of an investment. By reinvesting dividends, shareholders can purchase shares or fractions of shares of some of the highest-profile publicly-traded companies. Rather than receiving a dividend check, the investor can use the dividend payout amount to purchase additional shares of the company.

Question 9: D – The dividend discount model is often used as a method of valuing the price of a stock by using predicted dividends and discounting them back to present value. It is calculated by dividing the dividend per share by the discount rate minus the dividend growth rate, and it is often used to determine a company’s value.

Question 10: True – The rating’s agency calculates that dividend cuts in U.S. traded common stock cost investors over $58 million in income in 2009, and the year saw the fewest number of companies increasing dividends and the most decreasing dividends since S&P began keeping track of the measure in 1955. Things improved dramatically for dividends through the first three months of 2010. Of the approximately 7,000 publicly owned companies reporting dividends, only 48 cut or omitted payouts in the first quarter. That’s 87% better than in the first quarter last year, when 367 companies cut or omitted dividends. More importantly, 284 companies raised dividends in the first quarter, a measure that’s up 47% from the same quarter last year, according to Standard & Poor’s.