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. Can dividends be paid out monthly?

    Find out if stocks can pay dividends monthly, and learn about the types of companies most likely to do so and how monthly ... Read Answer >>
  2. Where can I find the past record dates for a company's cash or stock dividend?

    Learn more about dividend record dates and how they are used to determine the recipient of dividends. Find out how to locate ... Read Answer >>
  3. How and when are stock dividends paid out?

    A dividend is determined quarterly after a company finalizes its income statement. Read Answer >>
  4. How are dividends usually paid out?

    Discover the two compensation methods commonly used by companies and mutual funds to make dividend payments on equity investments. Read Answer >>
  5. How do dividends affect retained earnings?

    Find out how distribution of dividends affects a company's retained earnings, including the difference between cash dividends ... Read Answer >>
  6. If I reinvest my dividends, are they still taxable?

    If you choose to reinvest your dividends, you still have to pay taxes as though you actually received the cash. However, ... Read Answer >>
Related Articles
  1. Investing

    Which Is Best: Cash Dividend Or Stock Dividend?

    Cash dividends are paid to shareholders when a company decides not to use the money for operations, but instead, transfer economic value to its shareholders.
  2. Investing

    How Dividends Affect Stock Prices

    Find out how dividends affect the price of the underlying stock, the role of market psychology and how to predict price changes after dividend declaration.
  3. Financial Advisor

    Understanding How Mutual Funds Pay Dividends

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  4. Investing

    How Dividends Affect Stockholders' Equity

    Find out how dividends affect a company's stockholders' equity and how the accounting process changes based on the type of dividend issued.
  5. Investing

    Put Dividends to Work in Your Portfolio

    Find out how a company can put its profits directly into your hands.
  6. Investing

    Due Diligence On Dividends

    Understanding dividends and how they work will help you become a more informed and successful investor.
  7. Investing

    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.
  8. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
RELATED TERMS
  1. Cash Dividend

    Money paid to stockholders, normally out of the corporation's ...
  2. Dividend

    A distribution of a portion of a company's earnings, decided ...
  3. Cash-And-Stock Dividend

    A corporation distributing earnings to its shareholders as both ...
  4. Unpaid Dividend

    A dividend that is owed to stockholders of record but has yet ...
  5. Accumulating Shares

    Common stock given to current shareholders of a company in place ...
  6. Stock Dividend

    A dividend payment made in the form of additional shares, rather ...
Hot Definitions
  1. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  4. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  5. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  6. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
Trading Center