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What Is A Dividend?

Mark Rosenberg

July 8, 2016

Many companies pay dividends to their shareholders on a regular basis. Here’s an introduction to this potential source of investment income.

WHAT IS A DIVIDEND?

A dividend is a distribution (usually in cash, occasionally in stock) made by a corporation to its shareholders. Not all corporations pay dividends. Those that do tend to be mature companies that believe they can better reward their shareholders by paying them a portion of their net earnings rather than reinvesting every cent in growing the company and ultimately the share price.

HOW OFTEN ARE DIVIDENDS PAID?

Cash dividends are usually paid quarterly, creating a potential stream of income for investors. The income can be reinvested or pocketed by the investor. Keep in mind, though, that dividends are not guaranteed. They can fluctuate in value and dry up altogether if the company decides to suspend them.

AM I ELIGIBLE FOR THE NEXT DIVIDEND?

You must purchase the stock before its ex-dividend date to receive the company’s next scheduled dividend. What is an ex-dividend date?

When a company’s board of directors declares a dividend, a number of dates—the record date, the ex-dividend date, and the payable date—are set. The record date is the day when an investor must be a “shareholder of record” with the corporation to receive the dividend. The ex-dividend date is generally two business days before the record date. And the payable date is the day when shareholders will actually be paid the dividend. To give you an example of how the dates generally work:

In this example, a corporation declares a cash dividend of $0.35 per share on March 10. The dividend will be paid on May 16 to investors who are shareholders of record on April 22. The ex-dividend date is two business days earlier, on April 20. To receive this dividend, you must purchase the stock before April 20.

PLEASE NOTE: All investing involves risk, including the possible loss of principal. When redeemed, a stock may be worth more or less than the amount originally invested.
 

 

   

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