Glossary of Dividend Investing Terms
Dividend investing has its own vocabulary. This glossary defines the 28 terms you'll encounter most frequently, organized alphabetically for quick reference.
AFFO (Adjusted Funds From Operations) - FFO minus recurring capital expenditures. A more conservative measure of REIT cash flow than FFO because it accounts for maintenance spending required to sustain properties.
Covered Call - An options strategy where you sell call options against shares you own to generate premium income. You collect cash upfront but cap your upside if the stock rises above the strike price.
Declaration Date - The day a company's board announces an upcoming dividend payment, including the amount and payment timeline. This creates certainty about the dividend.
Dividend Achiever - A company that has increased its dividend for at least 10 consecutive years. Less exclusive than Aristocrats or Kings, but still signals commitment to dividend growth.
Dividend Aristocrat - An S&P 500 company that has increased its dividend for at least 25 consecutive years. There are currently 69 Aristocrats (2025 record high). Consumer Staples represents 22.5% of the index.
Dividend Coverage Ratio - The number of times a company can pay its dividend from earnings or cash flow. Calculated as Earnings (or FCF) / Dividends. Higher is safer—above 2.0x is conservative.
Dividend King - A company that has increased its dividend for at least 50 consecutive years. The most exclusive dividend growth category, demonstrating multi-generational commitment.
Dividend Yield - Annual dividend per share divided by current stock price, expressed as a percentage. The S&P 500 currently yields approximately 1.3-1.5%.
DRIP (Dividend Reinvestment Plan) - A program that automatically reinvests dividends to purchase additional shares. Compounds returns over time—a $10,000 investment with 5% yield grows to $26,533 in 20 years with reinvestment versus $20,000 without.
Ex-Dividend Date - The first day a stock trades without the right to the upcoming dividend. You must own shares BEFORE this date to receive the dividend. Stock price typically drops by approximately the dividend amount on this date.
FCF Payout Ratio - Percentage of free cash flow paid as dividends. Calculated as Total Dividends / Free Cash Flow. More reliable than earnings-based payout ratio because it measures actual cash available.
FFO (Funds From Operations) - The primary cash flow metric for REITs. Calculated as Net Income + Depreciation + Amortization - Gains on Property Sales. REITs use FFO instead of earnings because depreciation on real estate often exceeds actual value decline.
Foreign Tax Credit - A U.S. tax credit for foreign taxes paid on international dividends, preventing double taxation. You can claim credits in taxable accounts using Form 1116.
ICTI (Investment Company Taxable Income) - The taxable income base for BDC distribution requirements. BDCs must distribute at least 90% of ICTI to maintain pass-through tax status.
NAV (Net Asset Value) - The per-share value of a fund's underlying holdings. ETFs trade near NAV; closed-end funds can trade at significant premiums or discounts to NAV.
Ordinary Dividend - A dividend taxed at ordinary income rates (10%-37%) because it doesn't meet qualified dividend requirements. REIT dividends and short-term holding dividends are typically ordinary.
Payment Date - The day dividend payments are actually deposited into shareholder accounts. Typically days to weeks after the record date.
Payout Ratio - Percentage of earnings paid as dividends. Calculated as Dividends Per Share / Earnings Per Share. The historically safest level is around 41%. Above 70% warrants caution; above 100% is unsustainable.
Premium/Discount - The difference between a closed-end fund's market price and its NAV. Premium means price exceeds NAV (overpriced); discount means price is below NAV (potentially attractive).
Qualified Dividend - A dividend eligible for preferential tax rates (0%, 15%, or 20%) because it meets holding period and source requirements. Requires holding shares for 61 days within a 121-day window around the ex-dividend date.
Record Date - The date a company checks its ownership records to determine who receives the dividend. Typically one business day after the ex-dividend date due to T+1 settlement.
RIC (Regulated Investment Company) - A tax classification under Subchapter M of the Internal Revenue Code that allows pass-through taxation for BDCs and mutual funds. Avoids double taxation when funds distribute income.
Total Shareholder Yield - Combined return from dividends plus share buybacks. Calculated as Dividend Yield + Buyback Yield. S&P 500 companies are expected to repurchase approximately $885 billion in 2024.
Withholding Tax - Tax withheld at source by a foreign country on dividends paid to non-residents. Default U.S. rate is 30%; most tax treaties reduce this to 15%.
Yield on Cost (YOC) - Annual dividend per share divided by your original purchase price. Shows income return on initial investment. Warren Buffett's Coca-Cola position generates approximately 57% YOC on his 1994 cost basis.
Yield Trap - A stock with an unusually high yield caused by a falling stock price rather than dividend increases. Often signals the dividend will be cut. A yield significantly above sector average warrants investigation.
This glossary covers foundational terms. As dividend investing evolves—and as you deepen your practice—new vocabulary emerges. Check back for updates.