What is a Dividend?

A dividend, which is determined by a company’s board of directors, is the distribution of a company’s earnings to its shareholders. As a company generates profit, those earnings are either reinvested in the business itself or awarded to the shareholders as dividends. In other words, dividends can be described as the participation in profit of a company. The larger your holding in the company, the more valuable your dividend will be.

According to United States federal law, dividends must be generated from a business’s profits rather than the corporation’s capital. This law, known as the capital rule, protects the corporation’s creditors. Although dividends are not mandatory, in most cases, companies may be obligated to pay out dividends once they have made a formal declaration.

As a general rule, dividends are distributed by a company on a quarterly basis. They may be paid out in cash or in the form of additional stock, which are referred to as stock dividends. In certain situations, a company may issue dividends in the form of inventory or other physical assets such as raw materials, electronics or vehicles. 

Key Takeaways

• Dividends are the distribution of a company’s earnings to its shareholders that is determined by the company’s board of directors. 
• Generally, dividends may be paid out in the form of cash of additional stock.
• Corporations typically pay out dividends on a quarterly basis.

Important Dates

The process of distributing dividends is highly technical and regulated by United States law. It's crucial to keep track of a number of important dates throughout the process.

• Declaration Date

The dividend pay-out process is initiated by a press release from a board of directors that states they have intentions to pay a dividend. The date in which the press release is used is known as the Declaration Date. 

• Record Date

During the press release, the board of directors will also announce the date in which the shareholders are entitled to the dividend payment. This date is called the Record Date or Date of Record. This is an essential element in the dividend payout process. In order to receive the dividend, you must be deemed a legal shareholder of the company on the record date. 

• Ex-Dividend Date

The ex-dividend date is typically set one business day before the dividend’s record date. In most cases, if you invest in a company in or after its ex–dividend date, you will not be entitled to the dividend payment. As long as you purchase stock before the ex-dividend date, you will be included in the payout.

• Payment Date

As the name implies, a dividend payment date is the date on which a dividend is scheduled to be paid out to shareholders. Usually, dividends are paid out at the end of each quarter. Nevertheless, some companies may choose to issue dividends on an annual basis. 

Bottom Line

Dividends are the main source of income for shareholders when it comes to investing in a public corporation. Moreover, dividends can also be used as a powerful tool to estimate the value of a stock. Through this method, known as the dividend discount model, a stock is considered to be worth the present value of all future dividends.

Do you have any more questions about dividends and how they should be issued? Our excellent business and corporate law attorneys can provide the assistance you've been seeking.