Equities - Dividends and Stock Splits

A dividend is a taxable payment declared by a company's directors and paid to shareholders out of the company's retained earnings. Typically, this is a cash transaction conducted quarterly. However, there is no law stating that a dividend has to be cash. Shares of stock or awards of the company's product are also acceptable to regulators. In fact, there is no law obligating a company to pay any dividend at all. Firms that tend to pay dividends are mostly blue chip and defensive stocks.

Calculating Dividends
Dividends are usually calculated in terms of dollars per share. To calculate your client's total dividend payment, multiply that figure by the number of shares your client holds. If XYZ Corporation declares a $2 per share annual dividend and your client owns 1,000 shares, his total dividend payment will be $2,000. Usually, dividends are paid quarterly, so your client can expect four equal payments of $500 each every three months.

A security is "ex-dividend" if it no longer carries the right to receive the most recently declared dividend. A security attains this status as of its ex-dividend date. By convention, this is two business days before the record date, the date by which an investor must own the share to be entitled to a dividend. If a seller wants to sell the stock and still be able to keep the dividend, he must do so no earlier than two business days before the record date. For transactions during the ex-dividend period, the seller will receive the dividend. On the ex- dividend date the stock price will be adjusted down by the amount of the dividend.

Companies sometimes change the number of outstanding shares, but for reasons that are tenuous. Stock splits occur when a company believes its share price is too high to be attractive for individual investors to purchase. The perception is that if a stock exceeds $100, people start looking for "cheaper" stocks, so the company mayl split each outstanding $100 share into two $50 shares; of course, there is no net difference in value.

The opposite may also happen. If a stock starts trading below $5, the directors might become concerned that the stock looks "weak" and perform a cosmetic reverse-split, splicing every five $5 shares together into one $25 share. Again, there is no real difference in value. A company would reverse split its stock to make it more attractive to institutional investors.

See Understanding Stock Splits for more on stock splits.

Preferred Stock
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