If a company earns a profit and chooses to make a dividend available to common shareholders, the company will announce the dividend, the amount, and the date that the payment will go out to shareholders.
As a general rule, a dividend amount and the date of record and payment will be set each quarter after the company has prepared its income report – this generally happens after the quarter ends – and once the board of directors review the financials.
Some companies that have traditionally paid dividends on a regular basis named their dividend payment dates for each quarter of the year. For example, IBM pays its dividend on the tenth of March, June, September and December.
Key Takeaways
A dividend is a distribution of some of a company’s profits to a class of its shareholders.
The date and dollar amount are set only once a quarter, once the board of directors sees the company’s financials.
You must buy shares before the ex-date to receive the declared dividend.
The record date is the day that you must be a shareholder on a company’s books to receive the dividend.
The payment date is when the company pays the declared dividend to those shareholders who own the stock before the ex-date.
Key Dividend Dates
The company officially declares a dividend and notifies all qualified shareholders after the board of directors’ approval. The dividend information will be reported by major stock quoting services for investors’ reference. Below are the four important dividend dates for an investor to be familiar with:
Dividend announcement date: The date on which the dividend is announced, the dividend amount, the ex-date, the record date and the payment date are declared.
The ex-dividend date: The date (or ex-date) before which an investor must have bought the stock to receive the coming dividend. The stock then starts to trade ex-dividend (or, without the dividend).
The record date: The date that determines all shareholders of record as of that date, who are thus eligible to receive the dividend. This date is usually set two days after the ex-date.
Payment date: the date dividends are distributed to shareholders. Usually this will fall around a month after the record date.
How Dividends Are Paid
A dividend is a distribution of some of the earnings of a corporation to a class of its shareholders. Dividends are usually credited to a brokerage account or paid out by check (often referred to as a dividend check). Dividend checks are sent to the stockholder, but can also be deposited directly into a shareholder’s account of choice, if desired.
The alternative to cash dividends is, of course, additional shares of stock – what we call dividend reinvestment. Many individual companies and mutual funds offer dividend reinvestment plans (DRIPs).
Once declared on the dividend declaration date, the firm is contractually obliged to pay the dividend.
When Dividends Are Paid
On the payment date, the company deposits the funds for shareholder disbursement with the Depository Trust Company (DTC), where the cash payments are disseminated to brokerage firms globally holding accounts for the company shares. The recipient firms appropriately credit cash dividends to client accounts or process reinvestment reseats based upon the direction from clients.
Mailed checks should be received within a few days of the payment date.
Dividend Reinvestment Plan (DRIP)
Some of the advantages to investors with a DRIP include that an investor who wants to increase the amount of current equity held through dividend payments can do so without having to continually reinvest dividend cheques (compared with receiving a dividend cheque and then purchasing additional shares on their own).
Not only are company-operated DRIPs commission-free (because there is no commission charged by a broker), but they’re particularly attractive to small investors because commission fees are a higher percentage of the cost of smaller purchases of stock.
Alternatively, some firms offer stockholders the ability to buy extra shares in cash at a discount of 1 per cent to 10 per cent. This is an advantage because you not only receive a discount, but you also avoid paying the commission that you would otherwise have to pay if you bought the stock through a brokerage firm.
Tax Implications of Dividends
The Internal Revenue Service (IRS) treats dividends as taxable income, in the same way that they would treat a cash dividend.
Tax treatment of dividend payments are specific to the type of dividend declared, whether these shares are in an account in your own name or in a tax-deferred account, and the length of time that you have owned these shares. Dividend payments are summarised for each tax year on Form 1099-DIV.
What Is a Dividend?
A dividend is a payment that a company makes to shareholders because the company has profited. A company can put all of its earnings back into the company, or it can share some (or all) of its earnings with its investor base. Dividends are income to investors, and for many investors they are the point.
Are Dividends a Return on Investment?
Why Is the Ex-Dividend Date Important to Know?
A purchaser who wants to buy a company’s shares so as to receive the dividend payment announced for that day has until the day before the ex-dividend date (or just ex-date) to make the purchase. If someone buys on or after the ex-date, they aren’t on the company’s records as a shareholder at the time the dividend is paid.
The Bottom Line
Dividends can be an appropriate way to distribute a portion of the company’s profits to their shareholders, however not all companies pay dividends. Some companies may choose to retain earnings and reinvest them in growth opportunities.
At that point, a company will announce the size of any dividend to be paid, and also the details of when and how this will occur. Specifically, all those who hold the stock by that date (referred to as the ex-date) will be paid on the following payment date. Investors who are paid dividends have the choice of taking their dividend in cash or in additional shares.
