Dividend payments are the portion of company profits paid to shareholders. Some investors have the very admirable goal of being able to live off their dividend payments. Dividends are viewed as an added return on investment, kind of like icing on the cake. Prior to investing in companies that pay dividends, an individual should understand some basic terms like declaration date, date of record, ex-dividend date, and payment date.
The board of directors of a company is the entity that approves the amount of dividends payable to shareholders. The date this board publicizes its intention to pay out a dividend is called the declaration date. A liability in the amount of total dividend payment is created on the financial statements of the company. The organization then officially owes this money to its shareholders at a future date.
Date of record reflects the day an individual must be listed on the company books as a shareholder in order to receive the dividend payment. The ex-dividend date is the cutoff for receiving the upcoming dividend payment. A stock usually begins trading at ex-dividend prices approximately two business days prior to the dividend payment date. Investors who purchase shares of the stock after the ex-dividend date will not receive the dividend payment. In this situation, the investor selling the shares will receive the dividend payment.
Payment date is the date the dividend is provided to shareholders and this usually occurs four times per year. The total dividend payment is divided into four equal portions and one-quarter of the dividend payment is made each quarter. McDonald’s and some other companies elect to pay their dividends annually, rather than quarterly.
There are also special dividends that a company can pay out in a one-time payment. This is a rare occurrence, often due to liquidating an investment, selling a business entity, or winning a major lawsuit. Special dividends may be paid in the form of cash, property, or stock and they have seen a recent increase due to their lower tax treatment. If they are classified as return of capital, they are a return of the money invested by shareholders, not a payout of profits. Dividends classified in this manner are not taxable, which is like a cherry on top of that cake.
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