Stock dividends come from a corporation's earnings, which get distributed to shareholders. Companies choose to either pay dividends in cash or as additional stock. The dividend amount is typically decided upon by the corporation's board of directors, and for cash dividends, shareholders receive a check each quarter. Companies paying dividends with stock pay at much less frequent intervals.
What Is a Stock Dividend?
A dividend represents your piece of the profits, from a company in which you own stock. When you invest money into the stock of a company, you're actually buying a part ownership in that entity. In exchange, you get to vote on certain company actions such as electing new members to the board of directors. You also get the privilege of being paid a share of the firm's profits, as decided by the board.
Each quarter, the board of directors announces the company's earnings, and along with that, the dividend amount per share, if any, that you can expect to receive for that quarter.
What Is a Stock Dividend Check?
When you own stock that pays dividends in cash, you'll receive them in the form of a check, typically paid each quarter. Many people invest in dividend-paying stocks for the purpose of creating an income stream for retirement. If you were to accumulate a large number of stocks in your portfolio, you may earn money in the form of capital gains on your stock when prices increase, but you can't use the cash unless you sell your shares.
Investors rely upon companies to pay dividends consistently, and if a company changes its policy and either quits paying or dramatically reduces its dividends, investors may look unfavorably upon the company, which could drive its stock price down.
What Is a Stock Dividend Example?
When you buy a dividend-paying stock, if you hold your shares on the "dividend record date," you'll be eligible to receive the next dividend. Each quarter, corporations have a "dividend declaration date," where they announce the amount of the quarterly dividend and the payment date. Once a firm determines its dividend record date, it gets assigned an "ex-dividend date," which is usually two days prior to the stock's dividend record date. Investors buying the stock before the ex-dividend date are eligible to receive the dividend.
As an example, the dividend for Coca-Cola Company, which has paid dividends since 1920, would be described as follows:
- Declared: 02/15/18
- Ex-date: 03/14/18
- Record: 03/15/18
- Payable: 04/02/18
- Amount: $0.39 (per share)
- Type: Regular cash
The company would also provide notes relevant to the dividend. In this case, Coca-Cola noted that the dividend was adjusted for a 2-for-1 stock split.
Do Dividends Reduce Profits?
When a company pays dividends, the money comes out of its retained earnings. This amount, shown on the company's balance sheet, represents the firm's accumulated net income since its inception. Each accounting period, the net income shown on the company's income statement gets transferred to this retained earnings account. The dividend payments do not come out of the current period net income, so they do not reduce the company's profit, nor are they classified as an expense.
Cynthia Gaffney has spent over 20 years in finance with experience in valuation, corporate financial planning, mergers & acquisitions consulting and small business ownership. She has worked as a financial writer and editor for several online finance and small business publications since 2011, including AZCentral.com's Small Business section, The Balance.com, Chron.com's Small Business section, and LegalBeagle.com. A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC.