If a company enjoys a profit and decides to pay a dividend to common shareholders, then it declares the dividend, the amount, and the date when it will be paid out to the shareholders.
Usually, dividend amounts and related dates are determined on a quarterly basis, after a company finalizes its income statementand the board of directors meets to review the company's financials.
Some companies with solid histories of paying dividends have established quarterly dividend payment dates. For example, IBM usually pays its dividends on the 10th of March, June, September, and December.
Key Takeaways
- A dividend is a payment of some of a company's earnings to a class of its shareholders.
- The payment date and amount are determined on a quarterly basis once the board of directors reviews a company's financials.
- You must buy shares before the ex-date to receive the declared dividend.
- The record date is the day on which you must be on the company’s books as a shareholder to receive the declared dividend.
- The payment date is the day the company pays the declared dividend to shareholders who own the stock before the ex-date.
Key Dividend Dates
If a dividend is declared, all qualified shareholders of the company are notified via a press release. The information is usually reported throughmajor stock quoting services for easy reference. The key dividend dates that an investor should be aware of are:
- The declaration date: The date that the dividend is declared and the dividend amount, ex-date, record date, and payment date are set.
- The ex-dividend date: The date (aka ex-date) before which an investor must have purchased the stock to receive the upcoming dividend. On this day, the stock begins trading ex-dividend (or, without the dividend).
- The record date: The date that determines all shareholders of record who are entitled to the dividend payment. This date usually occurs two days after the ex-date.
- The payment date: This is the day dividend payments are issued to shareholders and is usually about one month after the record date.
How Dividends Are Paid
A dividend is the distribution of some of a company's earnings as cash to a class of its shareholders. Dividends typically are credited to a brokerage account or paid in the form of a dividend check. The dividendcheck is mailed to stockholders but can be direct-deposited to a shareholder's account of choice, if preferred.
The alternative to cash dividends is additional shares of stock. This is known as dividend reinvestment. Dividend reinvestment plans (DRIPs) are commonly offered by individual companies and mutual funds.
Once a dividend is announced on the declaration date, the company has a legal responsibility to pay it.
When Dividends Are Paid
On the payment date, the company deposits the funds for disbursem*nt to shareholders with the Depository Trust Company (DTC). Cash payments are then disbursed by the DTC to brokerage firms around the world where shareholders have accounts that hold the company's shares. The recipient firms appropriately apply cash dividends to client accounts, or process reinvestment transactions, as per a client's instructions.
Mailed checks should be received within a few days of the payment date.
Dividend Reinvestment Plan (DRIP)
A dividend reinvestment plan (DRIP) offers a number of advantages to investors. If the investor prefers to build their current equity holdings using funds from dividend payments, automatic dividend reinvestment simplifies this process (as compared to receiving the dividend payment in cash and then using the cash to purchase additional shares).
Company-operated DRIPs are usually commission-free, since they bypass a broker. This feature is particularly appealing to small investors since commission fees are proportionately larger for smaller purchases of stock.
Another potential benefit of DRIPs is that some companies offer stockholders the option to purchase additional shares in cash at a discount. With a discount from 1% to 10%, plus the added benefit of not paying commission fees, investors can acquire additional stock holdings at an advantageous cost (compared to buying shares in cash through a brokerage firm).
Tax Implications of Dividends
Dividends are always considered taxable income by the Internal Revenue Service (IRS), regardless of the form in which they are paid.
Specific tax implications for the dividend payments vary depending on the type of dividend declared, account type in which the shareholder owns the shares, and how long the shareholder has owned the shares. Dividend payments are summarized for each tax year on Form 1099-DIV.
What Is a Dividend?
A dividend is a payment that a company chooses to make to shareholders when the company has a profit. Companies can either reinvest their earnings in themselves or share some (or all) with its investors. Dividends represent income for investors and are the primary goal for many.
Are Dividends a Return on Investment?
Yes, dividends are considered a part of what's referred to as total return, which is income produced by an investment (e.g., dividends, interest) plus the appreciation of the investment's price.
Why Is the Ex-Dividend Date Important to Know?
Investors who wish to buy shares in companies in order to receive a recently announced dividend payment have until the day before the ex-dividend date (or ex-date) to make their purchase. If they buy on or after the ex-date, they won't be on the company's records as a shareholder in time to receive the upcoming dividend.
The Bottom Line
Dividends are a way for companies to distribute profits to their shareholders, but not all companies pay dividends. Some companies may decide to retain their earnings to re-invest for growth opportunities instead.
If dividends are to be paid, a company will declare the amount of the dividend and all relevant dates. Then, all holders of the stock (by the ex-date) will be paid accordingly on the upcoming payment date. Investors who receive dividends can choose to take them as cash or as additional shares.
