Dividends
Dividends are simply a distribution of profits that a company has earned over during a given period of
time that is paid to its shareholders. While not all companies pay them, many do because they know that
it keeps their current investors happy and it also adds a bit of incentive for others to invest in the company.
Generally, they are paid in the form of cash to the shareholders, although it's not entirely uncommon
to have dividends paid in the form of additional shares of stock. If a company declares a dividend it can be
determined by the amount of profit that the company made, which is known as a variable dividend, or it can be a
fixed-rate dividend known as preferred dividends. As discussed on our preferred stock page, companies will
usually pay their preferred stockholders a dividend even if the common stockholders get nothing.
Also, this is important to remember: when dividends are paid, the price of stock is reduced by the exact amount of the dividend. So
if the stock price is currently $50/ share, and the board of directors declares a dividend of $.50/share, the stock price will then automatically
decrease to $49.50/share at the time the dividend is paid.
When dealing with dividends there are four dates with which to be familiar:
Declaration date – This is the date that the company's board of directions makes the decision to pay a
dividend out to its shareholders.
Ex-dividend Date – All shares of stock bought on the ex-dividend date no longer come with a right to the
most recent dividend payment. Prior to the ex-dividend date anyone who sells shares loses their right to the
dividend, and anyone who purchases the stock retains the right to receive the dividend. However, after the
ex-dividend date, anyone who sells the stock prior to the payable date still receives the dividend, but
anyone who purchases the stock does not.
Record Date – All shareholders who are properly registered owners of the stock by this date will receive
the dividend payment.
Payable Date – This is the date that the dividend distribution is actually made.
As a final note, some companies offer dividend reinvestment plans (DRIP's) which allow you to purchase additional shares of stock
with your dividend payout instead of taking cash.
Dividends are not the only way to make money by investing in stocks. See also capital appreciation.
