Growing businesses need to retain their earnings to continue to grow, while large, established companies are already profitable. Most companies with plenty of available cash choose to pay a dividend. Companies that pay dividends tend to develop a dividend policy over time, which guides how much to pay out to shareholders. The amount of a company's dividend each quarter is voted on and must be approved by the company's board of directors. Most companies that pay a regular dividend do so quarterly.
After the board of directors agrees on the amount of a dividend payment, the company officially declares -- announces -- its next dividend. This day is known as the declaration date. On the declaration date, the company also indicates a date, known as the record date, on which you must be a shareholder in the company in order to receive the declared dividend payment. The establishment of the record date in turn sets the ex-dividend date, which is the first day that shareholders purchasing the stock are not eligible to receive the declared dividend.
The ex-dividend date occurs one business day before the record date. The payment date is the date on which the dividend payment is actually disbursed to shareholders. If a shareholder is receiving a dividend by mail, dividend checks are mailed on the payment date. If you own dividend-paying stocks in a taxable brokerage account, the dividends you receive are taxed as either ordinary income or qualified dividends. Dividends that are "qualified" are taxed at lower, long-term capital gains rates.
If you own the dividend stock in a tax-advantaged account, you are not taxed on dividends received. These are some of the account types that exempt you from paying taxes on dividends, provided you do not withdraw money from the account:. Federal Realty Trust has increased its regular quarterly dividend in each of the past 53 years, qualifying it as both a Dividend Aristocrat and a Dividend King. While dividend payouts can be routine or circumstance-specific, a company's aim in making dividend payments is usually always the same -- to return to shareholders any excess profits that are not needed for the business.
Credit Cards. Next Advisor Logo. Share Share on Social Media. Lindsey Danis July 15, 5 Min Read. Getty Images. Editorial Independence We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission.
For more information, see How We Make Money. Trending 1. In your inbox every Tuesday. A valid email address is required. You must check the box to agree to the terms and conditions. Thanks for signing up! Sign up. Follow Us Facebook externa link icon. Twitter externa link icon. Instagram externa link icon. LinkedIn externa link icon. Dividends are usually paid twice a year. Portion of company profits are divided and paid to shareholders per share owned. Companies announce to the market when they intend to pay a dividend, and how much that dividend will be.
Generally they' will also send a letter to shareholders with this dividend information. This is often referred to as 'declaring a dividend'. As part of its dividend announcement, the company will state the 'ex dividend' date. In order to receive the dividend, you must own the shares on the ex-dividend date - practically, this means you need to have purchased the shares before the ex-dividend date.
On the ex-dividend date, the company's share price will often fall by approximately the amount of the dividend, to reflect that buyers from that date onward will not be eligible to receive that particular dividend. The payment date is, as the name suggests, the date the company pays the dividend to shareholders. The payment date is usually some time after the ex-dividend date, often between 4 and 8 weeks. In Australia, dividends often come with bonus tax credits, called franking or imputation credits.
Dividends are paid out of company profits, and franking credits represent the company tax that has already been paid on those profits. For Australian investors, franking credits have the effect of potentially reducing the investor's taxable income.
This is because franking credits represent tax already paid on the dividend by the company, at the company tax rate. Investors on a low marginal tax rate may even be able to claim a refund on part or all of the franking credits they receive, and thus receive money back from the Australian Taxation Office at tax time. Some companies give shareholders the option to reinvest dividends in the form of additional shares in the company, rather than in cash.
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