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DividendsDividends are Dividends were the primary reason investors purchased stock. It was literally said "the purpose of a company is to pay dividends". Today, the investor's view is a bit more refined; it could be stated, instead, as, " the purpose of a company is to increase my wealth". Indeed, today's investor looks to dividends and capital gains as a source of increase. Microsoft for example, did not pay a dividend until it had already become a $350 billion company, long after making the company's founders and long-term shareholders multi-millionaires or billionaires. THE PROCESS 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 declaratin 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 of Directors 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. According to Barron's a stock will usually begin trading ex-dividend or ex-rights the fourth business day before the payment date. In other words, only the owners of the shares on or before that date will receive the dividend. If you purchased shares of Coke 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 the company. A vast majority of dividends are paid four times a year on a quarterly basis. This means that when an investor sees that Coke pays a $1 dividend, he will actually receive $.25 per share four times a year. Some companies, pay dividends on an annual basis. TYPES OF DIVIDENDS Cash Dividends Regular cash dividends are those paid out of a company's profits to the owners of the business. A company that has preferred stock issued must make the dividend payment on those shares before a single penny can be paid out to the common stockholders. The preferred stock dividend is usually set whereas the common stock dividend is determined at the sole discretion of the Board of Directors. Property Dividends A property dividend is when a company distributes property to shareholders instead of cash or stock. Property dividends can literally take the form of railroad cars. cocoa beans, pencils, gold, silver or any other item with tangible value. Property dividends are recorded at market value on the declaration date. Special One Time Dividends In addition to regular dividends, there are times a company may pay a special one-time dividend. These are rare and can occur for a variety of reasons such as a major litigation win, the sale of a business or liquidation of an investment. They can take the form of cash, stock or property dividends. Due to the temporarily lower rates of taxation on dividends, there has been an increase in special dividends paid in recent years. To add sugar to spice, there are times when these, special one-time dividends are classified as a "return of capital". In essence these payments are not a payout of the company's profits but instead a return of money shareholders have invested in the business. As a result, return of capital dividends are tax-free.
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