Companies sometimes distribute value back to their shareholders by paying out dividends. Dividend payments are usually made quarterly and may be in the form of cash (cash dividend) or stock (stock dividend) or a combination of both.
The dividend yield on common stock depends on such things as earnings and available cash of the corporation as well as future plans for expansion.
The dividend on preferred stock is usually a fixed amount and if the company has preferred stock issued, dividend payment on those shares must be made first before the holders of common stock can be paid anything.
When a company declares a dividend, it sets a record date when an investor must be on the company's books as a shareholder in order to receive the dividend. Once the company sets the record date, the stock exchanges or the National Association of Securities Dealers, Inc. fix the ex-dividend date.
If you purchased a stock before the ex-dividend date, you qualify for the dividend. You will not receive the next dividend payment if you purchased the stock on its ex-dividend date or after.
It used to be said that the only reason to buy stocks is for the dividends. Investors nowadays are more sophisticated and are able to appreciate the many other ways in which a company can reward its shareholders other than paying dividends.
Moreover, because dividend payouts are taxed as income, paying dividends may not be a tax-efficient way of increasing shareholder wealth.
One way of increasing value for the shareholders to through a stock repurchase program. Another way is to reinvest profits to grow the company instead of paying them out as dividends.
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