Common stock shares can earn dividends. Preferred shareholders are entitled to any initial dividend distributions, but once these investors are paid, common stockholders are considered next. Dividends are not a required, feature but some corporations routinely make distributions on common stock. Distributions are made quarterly or yearly, and can be issued as cash or additional shares of stock.
A company that has ample profits in a period may decide to reward common shareholders with dividend distributions. Another option is to use quarterly or yearly proceeds to reinvest into the business. When a dividend payment is desired, a company's management team must receive the support from a board of directors before any distributions are made. Preferred stock is a type of equity investment that is attractive largely for the dividend payments and explains why preferred shareholders are entitled to dividend proceeds before common shareholders.
Some corporations are so dependable for paying common-stock dividends that investors use dividend investing as a strategy. Investors can receive some support for this strategy from the Standard & Poor's Dividend Aristocrats Index. This barometer tracks returns in leading stocks that are in the S&P 500 index. To qualify, companies must have a history of increasing dividend distributions annually for the past quarter-century. In 2010, three companies, including Eli Lilly, SuperValu and Integrys Energy Group, lost their S&P dividend-aristocrat status.
When a company decides to make common stock dividend distributions, not all shareholders are entitled to the payout. The company maintains records in order to determine which shareholders owned equity in the company in time to be eligible for the payout. Once a dividend has been announced, a record date is established. This date informs the company of the common-stock shareholders who are owed the dividend. Investors must buy common stock shares before an ex-dividend date, which is usually a couple of days before the record date, to be included on the company's distribution list.
When a company has enough profits to distribute dividends, preferred shareholders are typically the first to be paid. One of the main features of preferred shares is the typical dividend payout. If a company has to stop a dividend for some reason, common-stock dividends are usually the first to end. When times are good, however, both preferred and common stock shareholders could receive distributions. In 2011, the Federal Agricultural Mortgage Corporation announced that both common stock and preferred shareholders would receive quarterly dividend payments.