What Is a Dividend? Everything You Need To Know

Jan 30, 2023 By Rick Novak

A dividend is a way for a company's board of directors to give its shareholders a share of its profits. Dividends are usually paid out every three months. They can come in the form of cash or more stock that can be re-invested. The dividend yield is shown as dividend/price as a percentage of the share price of a company, for example, 2.5%. Shareholders of companies that pay dividends can get a payout if they own the shares before the ex-dividend date. When compared to the market as a whole, companies that raise their dividends every year are less volatile. Some companies respond to inflation by giving out more dividends. Also, dividend income might help a stock's overall performance stay about the same.

Understanding Dividends

Dividends must be approved by the shareholders, who vote with their shares. Dividends are often paid out in cash, but they can also be given out as stock shares. Mutual funds and exchange-traded funds also pay dividends (ETFs). A dividend is a payment made to shareholders in exchange for their investment in a company's stock. It is usually based on the company's net earnings. Even if a company keeps its profits and uses them to run the business now and in the future, the rest can be given to shareholders as a dividend.

Companies can keep paying dividends even if their earnings aren't enough to keep up with what they've always done. The board of directors can announce dividends differently and at different times. Dividends can be paid at regular times, like once a month, three times a year, or once a year.

Dividend-Paying Organizations

Most of the time, the best dividend payers are larger, more established companies that have been making money for a long time. The following industries have a history of paying dividends:

  • Utilities
  • Fundamental materials,
  • Petroleum and natural gas
  • Banks and financial institutions, health care, and pharmaceuticals

Companies set up as master limited partnerships (MLPs) or real estate investment trusts (REITs) must make certain payments to their shareholders. Funds can also give out monthly dividends if that's what their investment goals are. Startups in the technology or biotech industries, for example, may not pay regular dividends because they are still in the early stages of growth and use their money for research and development, company growth, and running the business.

Vital Dividend Dates

Dividends are paid out in the order that events happened, and the dates are important for figuring out which shareholders are eligible to get the payment.

  • Date of announcement: Dividends are announced by the company's management on the day of the announcement, and shareholders must agree to pay them before they can be made.
  • Ex-dividend date: The ex-dividend date, also called the ex-date, is the last day you can get dividends. For example, suppose a company's ex-date is Monday, May 5. In that case, shareholders who buy shares on or after that date will NOT be eligible for the dividend. Shareholders can get the dividend if they own the shares at least one business day before the ex-date, Friday, May 2.
  • Record date: The record date is the date the company sets as the deadline for determining who is eligible to get a dividend or payment.
  • Date of payment: The Company pays the dividend on the payment date, which is when the money is put into the accounts of investors.

Dividends On Mutual Funds

Dividends given by bonds or mutual funds are different from dividends given by corporations. The net asset value (NAV) measures how much their holdings are worth or how much the assets in their portfolio are worth. Fixed dividend payments must not be taken as a sign that the fund is doing well.

For instance, a bond-investing stock could pay monthly dividends because it earns interest on its interest-bearing securities every month and gives all or part of that money to the people who own it. A fund that invests in stocks gives out dividends based on the profits of the many companies in its portfolio or on the capital gains from selling a specific piece of stock.

Are Dividends Levied?

All forms of dividends are subject to taxation. Qualified dividends are paid out by US-based or US-traded firms to shareholders who have held the shares for at least 60 days and are subject to capital gains tax rates. Qualified dividends are distributed to shareholders who have held the shares for at least 60 days. All other types of dividends are subject to the standard income tax rates.

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