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Stock Dividends Basics

Dividends represent the profits that a company distributes to its owners. This is the major function, namely to make profits on behalf of its shareholders. So, investing in company stocks that pay dividends can be used as a method of making money.

Dividend Types

Typically, there are two major forms of dividends:

  1. Fixed Dividends

    These usually go to shareholders that hold preferred stocks.

  2. Variable Dividends

    These usually go to shareholders that hold common stocks.

A history of regular dividend paying is what most investors look for when deciding on the investment in a particular company. Such companies are usually well established and enjoy high level of profitability. However, their growth potential may not be very beneficial.

Most companies pay their shareholders dividends in the form of cash. Additionally, some companies prefer to distribute profits in the form of stocks. The amount to be paid in the form of a dividend is determined by the board of directors which meets quarterly to decide on the amounts, which in turn are set at a per share basis. For, instance the quarterly dividend per share is $0.40. So, if you hold 200 shares you will get $80 this quarter.

However, companies pay dividends at their own discretion. This means that they are not obliged to do so and in case they have some future plans that require additional funds, the company may not distribute dividends.

Stock Dividend Dates to Remember

The dates you should remember concerning dividends are as follows:

  1. Record Date

    At this date the list of shareholders that will receive dividends is compiled. Thus, you should become an owner of stocks before this date in order to be eligible for dividends.

  2. Ex-Dividend Date

    This is the most important of the four dates to know. It is usually set 2 to 4 days before the record date. This time period is required for the completion of all pending stock transactions. On this date, the market discounts the price of the stock. This is done since the dividend is no longer available to buyers.

  3. Declaration Date

    At this date the board of directors decides on the amount of the dividend and the date at which the shareholders will receive it. Also at this meeting the Ex-dividend date is announced.

  4. Payment Date

    Usually occurring two weeks after the record date, this is the time when the company mails the check with the dividend amount to its shareholders.

Finally, dividends are viewed as a great way to make money out of stocks. Dividends are recommended in case you are more interested in achieving some level of current income. Additionally, many investors consider dividends as a good way to meet their financial goals.

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