One benefit of owning a stock is the potential that you will be paid a dividend. The distribution of dividend payments is another way for a
company to share its profit with you. A dividend means that the company pays you a certain amount of money, either as a one-time payment or
more commonly on a quarterly basis, for each share of stock you own.
Many times, dividends come at the expense of greater price appreciation, because the company is distributing its profits to shareholders rather than
reinvesting the profits back into the growth of the company. However, companies that pay dividends can be very attractive to investors when they offer
a steady stream of income. There are some important terms and dates an investor should be familiar with before purchasing any dividend-paying companies.
Let's work through an example to help better explain some of these terms:
On March 1, ABC Widget Company has decided that because it holds excess cash and lacks investment opportunities, it would like to reward
shareholders with a regular quarterly dividend payment. The date for this particular announcement is known as the declaration date. It is on this
date that the company announces the specific dividend payment along with the holder of record date (aka record date) and the payment date. The company
announces that a dividend payment of 25 cents per share will be payable March 31, 2011 (the payment date) to all shareholders of record at the close
of business on March 16, 2011 (holder of record date). What does this all mean? Well the short story is that the company looks at its records on March
16 and anyone listed on the books as an owner of ABC Widget company will be eligible for the dividend payment (on March 31).
The one other important term to remember is the ex-dividend date. The ex-dividend date (typically two trading days before the holder of record date for
U.S. securities) is the day in which a company begins trading without the dividend. In order to have a claim on a dividend, shares must be purchased no
later than the last business day before the ex-dividend date. A company trading ex-dividend will have the upcoming dividend subtracted from the share
price at the start of the trading day. Many times, the price of a stock will increase in anticipation of the upcoming dividend as the ex-dividend date
approaches, yet will fall back by the amount of the dividend on the ex-dividend date.