A:

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.

RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. What are the dividend reinvestment options for a mutual fund?

    There are two primary choices for how investors can choose to handle dividend distributions made by mutual funds that they ... Read Full Answer >>
  3. Do mutual funds pay dividends or interest?

    Depending on the type of investments included in the portfolio, mutual funds may pay dividends, interest, or both. Types ... Read Full Answer >>
  4. Should I sell my shares if a company suspends its dividend?

    Since 2008, when the Federal Reserve slashed interest rates to zero and then kept them there indefinitely, dividend-paying ... Read Full Answer >>
  5. Do hedge funds pay dividends?

    Hedge funds rarely pay dividends to the accredited investors who invest directly in them. Instead, these investors share ... Read Full Answer >>
  6. Which mutual funds pay the highest dividends?

    For many people, the reliability of dividend or interest income is one of the primary benefits of investing. Like individuals ... Read Full Answer >>
Related Articles
  1. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  2. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  3. Investing Basics

    Contingent Convertible Bonds: Bumpy Ride Ahead

    European banks' CoCos are in crisis. What investors who hold these high-reward but high-risk bonds should know.
  4. Investing Basics

    4 Things That Make a Stock a Safe Bet

    No investment is a sure bet, but you can reduce your chances of taking a loss by choosing fair-priced stocks with growth potential and low volatility.
  5. Investing Basics

    The Complete Guide to Financing an Investment Property

    If you're considering adding an investment property to your portfolio, you need to know what your options are for financing its purchase.
  6. Investing Basics

    A Beginner's Guide to Investing in Company Stock Plans

    There are certain advantages to investing in your employer's stock but there are some potential drawbacks to be aware of.
  7. Stock Analysis

    The 5 Best Stocks That Pay Monthly Dividends (PSEC, LTC)

    Get the scoop on five of the best stocks that pay regular monthly dividends, offering investors looking for regular income dividend yields of up to 16%.
  8. Stock Analysis

    The Top Rated Dividend Paying Stocks for 2016 (ABBV, BA)

    Discover five of the top-rated stocks that pay investors solid dividends that you may want to consider adding to your investment portfolio in 2016.
  9. Mutual Funds & ETFs

    The 4 Best Indexes for Dividends

    Learn about some of the biggest dividend indexes in the marketplace and which niche of the dividend universe each of these indexes targets.
  10. Mutual Funds & ETFs

    The 3 Best American Funds for the Income Seeker in 2016

    Learn about American Funds' mutual fund offerings, their past performance compared to peers and three American funds to consider for income investors.
RELATED TERMS
  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 ...
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center