When a company makes a profit and decides not to reinvest the profit in the business, it can pay out a portion to each of its shareholders. This is called a dividend. When a company decides to pay out a dividend, it will announce it to the shareholders on a date called the declaration date. Investors are required to have owned the stock by a certain date (called the record date) in order to receive a portion. On the payment date, the company will generally issue either stock or cash to its shareholders.

The amount each shareholder receives depends on the amount of shares he or she owns. For example, if the dividend is 15 cents per share and you own 50 shares, your portion of the overall dividend paid will be $7.50. If the company is paying the dividend in shares, the corporation will generally determine what fractional percentage of a full share each owned share entitles stockholders to. For example, a company may decide that the dividend is one tenth of a share for every share stockholders own. If you own 100 shares it means you'll end up with 10 full shares as your dividend.

A stockholder doesn't need to do anything to get her dividend. It will be added to her brokerage or retirement account in the format dictated by the issuing corporation. If the stockholder has a reinvestment directive, then cash dividends will likely immediately purchase new shares. Otherwise, the cash might sit in the sweep account until it's invested. Cash dividends are taxed, so the investor should expect to receive a 1099-DIV at year's end.

  1. How often do mutual funds pay capital gains?

    The frequency with which mutual funds pay capital gains varies. However, funds that generate a profit within a given year ... Read Full Answer >>
  2. Can dividends be paid out monthly?

    Though it is more common for dividends to be paid quarterly or annually, some stocks do pay monthly dividends. Dividends: ... Read Full Answer >>
  3. Are dividends considered an asset?

    Whether dividends paid on stock are considered an asset depends on which role you play in the investment: the issuing company ... Read Full Answer >>
  4. Are dividends considered passive or ordinary income?

    Despite the fact that earning dividends requires no active participation on the part of the shareholder, they do not meet ... Read Full Answer >>
  5. How do dividends affect net asset value (NAV) in mutual funds?

    Distribution of dividends reduces the net asset value (NAV) of mutual fund shares. However, this doesn't mean that fund investors ... Read Full Answer >>
  6. Is dividend income taxable?

    Dividend income is taxable but it is taxed in different ways depending on whether the dividends are qualified or nonqualified. ... Read Full Answer >>
Related Articles
  1. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  2. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  3. Mutual Funds & ETFs

    How to Find Mutual Funds With High Dividends

    Learn about the important factors to consider when looking for mutual funds that pay high dividends, including how they may impact your taxes.
  4. Investing

    What is Cumulative Preferred Stock?

    Cumulative preferred stock is a type of stock that stipulates any skipped or omitted dividends must be paid to its holders before common shareholders can receive dividends.
  5. Stock Analysis

    Exxon Mobil Stock: A Dividend Analysis

    Learn about Exxon's strong history of paying and growing dividends. Understand how the company's revenues are hurt by low commodity prices.
  6. Stock Analysis

    Schlumberger Vs. Halliburton Stock: Which One to Choose?

    Read about the differences between Schlumberger and Halliburton, two large companies that operate in the oilfield services sector.
  7. Stock Analysis

    AT&T Stock: A Dividend Analysis

    Discover analysis of AT&T dividend policies, and explore the dividend policies of its main competitors, China Mobile Limited and Verizon Communications.
  8. Stock Analysis

    The 5 Best Dividend Stocks in the Energy Sector

    Learn about the top five dividend companies that operate in energy-related industries that explore, develop, drill, extract and transport energy sources.
  9. Stock Analysis

    Coca-Cola Stock: A Dividend Analysis

    Discover analysis of The Coca-Cola Company's dividend policy, and learn about the dividend policies of its competitors, PepsiCo and Dr Pepper Snapple.
  10. Mutual Funds & ETFs

    Understanding Taxes on Mutual Funds Dividends

    Learn about the basics of mutual fund dividend taxation, including how and why mutual funds pay dividends and when different tax rates apply to dividend income.
  1. Record Date

    The cut-off date established by a company in order to determine ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through ...
  3. Profit Margin

    Profit margin is part of a category of profitability ratios calculated ...
  4. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  5. Dividend Payout Ratio

    The percentage of earnings paid to shareholders in dividends. ...
  6. Dividend

    A distribution of a portion of a company's earnings, decided ...

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!