Dividends are a distribution of profits from corporate companies to shareholders. They can be in cash or stock. The actual amount that a company will pay is determined by the board of directors. Different cash dividends are paid on a three-monthly schedule. Stock dividends are paid infrequently.
HOW DO DIVIDENDS COME WORK?
It is important to know when dividends are paid when you investigate a company. It is easy to get confused by the many dates that a company may need to notify investors about their dividend structure. Pay attention to these terms:
Dividend declaration date: This is when a company’s board announces that it will pay compensation. The board decides the amount and how it will be paid to shareholders.
Dividend Record Date: This is the date that a corporation records its books in order to examine its “shareholders” of record. They who are able to hold the stock on that date will receive the dividend payment.
Ex-dividend Date (Ex-dividend Date): The Record Date is analyzed by the National Association of Securities Dealers, (NASD). This allows stock exchanges and the National Association of Securities Dealers to assign the ex-dividend dates. Stocks have an ex-dividend date that is two business days before the record date. Investors who purchase stock prior to the ex-dividend day will receive their dividend. They are not allowed to receive the dividend if they purchase the stock after the ex-dividend day. The dividend amount is usually changed when the share price drops on the ex-dividend day.
WHY DOES DIVIDENDS MATTTER?
Many investors consider dividends as a source for earning. Let’s say you are retired and have a large portion of your portfolio invested in stocks. You will not be able to see the capital gains in your stock shares if they rise in value over time. If these stocks pay dividends you will receive a check in your mail four times per year for your share of the company’s profits.
These payments are essential for the relationship between investor and company. General Motors recently cut their long-running dividend to try and avoid bankruptcy in the financial crisis that began in 2008. Many former GM employees were upset by this decision. They depended on the company’s dividend payments. There have been instances when a company’s stock price dropped amid discussions about cutting dividends. This is a clear indication that a steady dividend payment is vital to a company’s financial well-being.