Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Dividend

What it is:

Dividends represent a distribution of corporate earnings to company shareholders and usually take place in one of two forms -- cash or stock. Each organization's board of directors determines the actual dividend amount that the firm will pay out. Most cash dividends are paid on a quarterly basis. Meanwhile, stock dividends are generally paid at infrequent intervals.

How it works (Example):

When researching a company, it is important to recognize when they pay dividends. However, it is easy to be confused by several different dates a company may specify when informing investors of their dividend structure. You should be aware of the following terms:

  • Dividend Declaration Date: This is the date on which a company's board of directors declares that a dividend will be paid. The board determines the amount of the dividend, as well as when it is to be paid to shareholders on record.

  • Dividend Record Date: This is the date on which a company reviews its books to determine its "shareholders of record." Shareholders who hold a particular stock on this date will receive the firm's dividend payment.

  • Ex-dividend Date: After the Record Date has been determined, the stock exchanges or the National Association of Securities Dealers (NASD) assign the ex-dividend date. The ex-dividend date for stocks is typically two business days prior to the record date. If an investor buys a stock before the ex dividend date, then they will receive the dividend payment. If they purchase the stock on or after the ex-dividend date, then they are not entitled to receive the dividend. On the ex-dividend date, a firm's share price usually declines to reflect the amount of the dividend paid. For example, if a stock is trading at $100 and pays a quarterly dividend of $3 per share, then, all other things being equal, the stock will open on the ex-dividend date at $97.

Why it Matters:

Many investors rely on dividend payments as a source of income. Say you are retired and hold a significant proportion of your investment portfolio in stocks. Even if share prices of your stocks increase over time, you will be unable to realize these capital gains until you sell your shares. However, if these stocks pay dividends, you will receive a check in the mail (usually four times a year) for your share of the companies' profits.

Dividend payments are very important to the relationship between company and investor. In recent history we saw General Motors cut their long-running dividend in an effort to avoid bankruptcy during the financial crisis that started in 2008. This enraged many former GM employees who lived on dividend payments from the corporation. Additionally, there have been cases of a company's stock price falling amid talks of cutting dividends, showing that a stable dividend payout is integral to a company's financial well-being.

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