How are dividends paid on common stock? Understanding how dividends are paid on common stock is an important skill of stock investing. New stock investors are often confused about how the dividends on their stocks will be paid.
Importances of Common Stock Dividends
Dividends can be an important part of the total return for stock investors and it is important to understand how dividends are paid on common stock. The S&P Dividend Aristocrats Index provides a good example of the power of stock dividends. The Dividend Aristocrats are a list of blue chip stocks with histories of consistent dividend growth. For the 5 year period that ended on May 31, 2010, the stock values of the Aristocrats had an average annual return of just 0.87 percent. When the dividends are added in the annual return to investors jumps to 3.85 percent. How are dividends paid on common stock?
Source of Common Stock Dividends
Corporations can elect to pay a portion of company profits to shareholders in the form of dividends. Dividend payments are determined by the company's board of directors, then announced with a formal press release. A lot of stocks pay regular quarterly dividends, but others will pay only once or twice a year. The amount of the dividend can be a steady rate or may vary based on the company's profits for the period. Each corporation develops its own dividend policy and no dividend payment is automatic. The board of directors must declare each payment and has the discretion to change the dividend amount and timing at any time.
Dividend Payment Process
All companies go through the same process to declare and pay a dividend to shareholders. Dividend payments are organized around a series of dates.
Declaration Date: This is the day when the corporation's board of directors makes the payment of the next dividend official. Many companies will provide the dividend declaration information with the release of their quarterly financial results.
Record Date: This is the date an investor must be an owner of the stock to receive the dividend payment. The record date is how the corporation determines who will receive the dividend payment. "Shareholders of record" are the share owners on the record date.
Payment Date: This is the date the dividend amount will be sent or deposited in the brokerage accounts of shareholders. The payment date can be a few days to several weeks after the record date. Investors do not need to still own the shares on the payment date. If the shares were owned on the record date, the dividend payment will be received.
The final date related to the payment of common stock dividends is the ex-dividend date. The ex-dividend date is two business days before the record date. Stock purchases require three days to settle, so to be an owner of record on the record date, the stock investor must actually buy the shares before the ex-dividend date. Any stock buyers who purchase shares on the ex-date or later will not be entitled to receive the dividend.
Dividend Investor Considerations
Investors who want to make common stock dividends a part of their investment strategy must do their research into each company's dividend policy and results. Spend some time in the investor relations section of the website of a prospective stock investment. Many site's will list the history of dividend payouts. Also, read through the last year's press releases to find out when the company typically schedules declaration, record and payment dates. The best dividend stocks pay a consistent, increasing dividend and have a level of net income that will support the current dividend and future dividend increases.
Common stock dividends are paid directly into share owners brokerage accounts on the payment date. You should receive an email or message in your account that a payment was received. For dividend stock investors it is a comforting experience to start having dividends increasing the value of their stock portfolio on a regular basis.