Dividends are the payments you receive from the stocks you hold from the profit that company makes. It is not necessary that all stocks pay dividends. Dividends are paid on regular basis according to the company schedule. It is the best way an investor earns income from the stocks he invested in. As not all dividends give profit, you need to choose the ones that give you profit after regular basis.
If you are going to invest in dividend stocks, it is necessary to have knowledge on how and when a dividend is paid. The most common cases is dividends are paid off four times a year or quarterly, or monthly depending on companies schedule. It is also important for newbies to know how dividends work. In this article, I will share complete details on how dividends work and when you receive a dividends on shares.
How Dividend Stocks Work?
A dividend is paid from the company’s profit per share you own of the company that means you are paid for every stock you legally own of a company. Lets take an example, If you are holding 50 shares and a company gives $3 dividend per year, then you will get $150 per year.
There are many types of dividends. Let have a look at them:
- Special dividends: On all company’s common shares dividends are paid out but like regular dividends it don’t recur. A company only give special dividend to distribute profits that has been saved from years and are not needed yet.
- Stock dividends: In this type, company instead of paying money as profit give the investors more shares of stock.
- Preferred dividends: In this dividend type, dividends are paid only to the preferred stock owner. Preferred stock is more like a bond than a stock. In most cases, dividends are paid quarterly, but unlike the common stocks, preferred dividends are fixed.
- Cash dividends: It is the most common and widely used type of dividend in which company pays the dividend in the form of cash directly to brokerage account.
- Dividend reinvestment programs: The last type is DRIPs in which investors are allowed to reinvest in the stocks of the company at discounted price.
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When You Receive Your Dividend?
The vast majority of the companies around the world pay dividends quarterly and some pay monthly or yearly. Dividends are declared by the Board of directors of that company every time it needs to be paid. There are four dates that are widely used while paying dividends:
Declaration date: It is the date when Board of directors announce their intention to pay dividend. On declaration date, the Board of directors also announces the payment date and date of record.
Date of record: It is the date when a company reviews its record to know who are the shareholders. If you are an investor, you must be a “holder of record” if you wish to receive the dividend payment. The shareholders are paid before the ex-dividend date.
Ex-dividend date: This is the most important dividend date. If you wish to receive the dividend payout, an investor must buy the shares of stock before the ex-dividend date.
Payment date: It is the date when the dividend payouts actually are given to the shareholders of the company.
These are the four dates that you must consider for the dividend payouts.