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

Stock Dividend

What it is:

Dividends are a distribution of corporate earnings to shareholders and usually take place in one of two forms -- cash or stock. A stock dividend is the latter of these two kinds of dividends. 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, but stock dividends are generally paid at infrequent intervals.

How it works (Example):

When researching a company, it is important to recognize when it pays 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 he or she will receive the dividend payment. If an investor purchases the stock on or after the ex-dividend date, then he or she is not entitled to receive the dividend. On the ex-dividend date, a firm's share price usually declines to reflect the value of the dividend paid.

Why it Matters:

Many investors rely on dividend payments as a source of income. Stock dividends, however, are more like doubling down on an investment. For the company, stock dividends are a way to give something back to shareholders without having to give up cash.

It is important to note that stock dividends often increase the number of shares outstanding. This can have a dramatic effect on calculations that rely on the number of shares outstanding, such as earnings per share.

Dividend payments are very important to the relationship between company and investor. Cuts in dividends can anger shareholders and even tank a stock price.

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