When a company has more money than it needs and makes the decision to hand some of it back to common shareholders in the form of a dividend.
The corporation announces both the amount of the dividend and the day on which it will be distributed to shareholders. After a firm has finalized its income statement and the board of directors has met to assess the company’s financials on a quarterly basis, the date and the amount are typically both established at that time. However, there are several exceptions to this rule.
Distribution Procedures for Dividends
A dividend is the distribution of a portion of a company’s earnings to a specific group of shareholders. Dividends are typically distributed in the form of a dividend check. They may, however, be compensated in additional shares of stock. Dividends are typically paid by check, which is mailed to stockholders a few days after the ex-dividend date, which is the date on which the stock begins trading without the previously declared dividend.
Dividends can be paid in the form of additional shares of stock as an alternative method. Dividend reinvestment is a practise that is commonly offered as a dividend reinvestment plan (DRIP) option by individual companies and mutual funds. The Internal Revenue Service (IRS) considers dividends to be taxable income at all times (regardless of the form in which they are paid).
Key Dividend Dates
If a dividend is declared, the company notifies all qualified shareholders via a press release; the information is usually reported through major stock quoting services for easy reference. An investor should keep the following dates in mind:
- The declaration date is the date on which the dividend is declared.
- A record date, or date of record, is set at the time of declaration. This means that the dividend is payable to all shareholders on record on that date.
- The ex-date is the day before the record date when the stock begins trading ex-dividend. This means that a buyer on the ex-date is purchasing shares that are ineligible for the most recent dividend payment.
- Typically, the payment date is one month after the record date.
The funds for disbursement to shareholders are deposited with the Depository Trust Company on the payment date (DTC). The DTC then distributes cash payments to brokerage firms around the world where shareholders hold the company’s shares. The recipient firms apply cash dividends to client accounts or process reinvestment transactions in accordance with the client’s instructions.
Dividend tax implications vary depending on the type of dividend declared, the account type in which the shareholder owns the shares, and the length of time the shareholder has owned the shares. Dividend payments are summarised on Form 1099-DIV for tax purposes for each tax year.
Dividend Reinvestment Plan (DRIP)
A dividend reinvestment plan (DRIP) provides several benefits to investors. If the investor prefers to simply add any additional funds from dividend payments to their current equity holdings, automatic dividend reinvestment simplifies this process (as opposed to receiving the dividend payment in cash and then using the cash to purchase additional shares). Because they do not use a broker, company-operated DRIPs are usually commission-free. This feature is especially appealing to small investors because commission fees are proportionately higher for smaller stock purchases.
Another potential advantage of DRIPs is that some companies allow stockholders to buy additional shares in cash at a discount. Investors can acquire additional stock holdings at a discounted price of 1% to 10%, plus the added benefit of not paying commission fees (over investors who purchase shares in cash through a brokerage firm).
In conclusion
Dividends are a method for businesses to distribute profits to shareholders; however, not all businesses pay dividends. Some businesses choose to keep their earnings in order to reinvest in future growth opportunities. If dividends are paid, a company will declare the amount of the dividend, and all stockholders (as of the ex-date) will be paid on the next payment date. Dividends received by investors may be kept as cash or reinvested in order to accumulate more shares.
Key Points
- A dividend is the distribution of a portion of a company’s earnings to a specific group of shareholders.
- If a company chooses to distribute dividends, the date and amount are usually determined on a quarterly basis, after the income statement is finalized and the board of directors meets to review the company’s financials.
- The Board of Directors announces the dividend, the amount of the dividend, the record date, and the payment date on the declaration date.
- The record date is the date by which you must be listed as a shareholder on the company’s books in order to receive the declared dividend.
- If you buy the stock before the ex-dividend date, you will receive the dividend; if you buy it on or after the ex-date, the seller will receive it.
- The payment date is the date on which the company pays the declared dividend to shareholders who owned the stock prior to the ex-date.