What is a dividend?
A dividend is a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).
Companies that earn a profit can do one of three things:
- Pay that profit out to shareholders
- Reinvest it in the business through expansion
- Reduce debt or share repurchases, or both
When a portion of the profit is paid out to shareholders, the payment is known as a dividend.
Dividends must be declared (i.e. approved) by a company’s Board of Directors each time they are paid. There are three important dates to remember regarding dividends:
- Declaration date: The declaration date is the day the Board of Directors announces their intention to pay a dividend. On this day, the company creates a liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date.
- Date of record: This date is also known as “ex-dividend” date. It is the day upon which the stockholders of record are entitled to the upcoming dividend payment. Only the owners of the shares on or before that date will receive the dividend. If you purchased shares after the ex-dividend date, you would not receive its upcoming dividend payment; the investor from whom you purchased your shares would.
- Payment date: This is the date the dividend will actually be given to the shareholders of company.