What is a dividend?
A company can decide to distribute some of its assets to its shareholders in the form of dividend payments. The most common type of dividend payment is the cash dividend payment, but in theory pretty much anything owned by the company could be given to the shareholders in the form of a dividend payment.
How much you get will depend on how many shares you own, and which share class or classes they belong to, since dividends are payed out equally to each share within the same share class.
A stock dividend is a dividend payment where the shareholders get company shares instead of cash. A dividend payment of this kind will not diminish the company´s cash balance.
Investing in dividend stock companies
When people talk about investing in dividend stocks, they mean buying shares in companies with a well-established track record of regular dividend payments.
It is important to remember that past actions is only in indicator; there are never any guarantees that the company will continue to pay dividends to shareholders in the future.
In general, dividend paying companies are well-established corporations with a long history of profitability. Examples of industry sectors where we find a lot of dividend-paying companies are Oil & Gas, Utilities, Healthcare & Pharmaceuticals, Banks & Financial, and Basic materials.
Make sure you buy shares of the right share class
If you wish to invest in a company because of the dividend payments, it is important to remember that companies are allowed to issue different classes of shares, and that different classes can be treated differently when it comes to dividend payments. It is only within each class that all shares must be treated exactly the same.
Here are a few examples of classes of shares:
Common shares (many stock companies only have common shares)
Preferred shares with a priority claim over common shares for dividend payments.
Zero-dividend preferred shares. If dividends are paid, these shares do not get any dividends.
Recurring and non-recurring dividends
A company can elect to pay dividends at a scheduled frequency, such as once a month, quarterly or annually. Two famous examples are Univeler and Walmart Inc. who both make scheduled quarterly dividend payments.
A company can also decide to make a non-recurring special dividend payment, either on its own or in addition to a scheduled dividend payment. This can for instance happen when a company has been unusually profitable.
Announcement date (also known as declaration date)
This is the day when the board of directors announces that they want the company to make a dividend payment, and the details regarding it. e.g. how much, when and for which classes of shares. In most jurisdictions, their proposal must then be approved by the shareholders to actually happen.
This is the date on which dividend eligibility expires.
Example: For this dividend payment, the ex-dividend date is May 20. If you buy shares in the company and become the owner of them on May 20 or later, the dividend payments will not go to you.
The company establishes a cut-off date to determine which shareholders are eligible to receive the dividends. This cut-off date is called the record date. To be eligible for the dividend, you must own the share at least two business days before the record date. Establishing a record date is necessary, since the owners of actively traded shares are changing continually. Many companies select the day following the ex-dividend date as the record date.
The payment date is the day on which the dividends (e.g. money) gets credited to the accounts of the eligible shareholders.