Companies that raise capital by issuing common stock to investors periodically make discretionary cash dividend payments to shareholders during periods of profitability. Because shares of common stock are exchanged on a daily basis, stock exchanges and corporate boards of directors establish two dates that determine which shareholders are eligible to receive a dividend payment. Whether or not shareholders owned shares at these points in time determine if they will receive dividends. However, the amount of the dividend each shareholder receives depends on the percentage of all outstanding common shares they own.
Important Dividend Dates
At the time a company’s board of directors declares a dividend to shareholders, they must also establish what the date of record is. The date of record indicates that the company will only issue the dividend payment to investors who own common shares in the company as of that date. However, once a board declares a dividend and sets the date of record, the stock exchange on which the shares trade establishes an “ex-dividend date,” which is usually two business days before the date of record. This means that if you purchase the stock on or after the ex-dividend date, you will not receive the cash dividend, despite having full ownership of the shares on the date of record. Instead, shareholders who owns the stock immediately prior to the ex-dividend date receives it even if they no longer own the shares on the date of record.
Outstanding Shares Allocation
Dividend dates are only relevant for establishing which shareholders are eligible to receive a dividend payment. However, the percentage of all outstanding common shares each shareholder owns is what dictates the amount of their dividend. The number of outstanding shares in the company provides the methodology for allocating the total dividend among shareholders. Outstanding common shares in a company refers to all stock that investors own, but excludes shares the company repurchases, which is commonly known as treasury stock. A company's board of directors will only consider current and prior year earnings when deciding on the total dividend it will distribute, regardless of what the resulting per-share allocation turns out to be.
Preferred Shareholder Implications
For purposes of determining your cash dividend, it’s important to consider the claims of preferred shareholders. Preferred shareholders take priority over common shareholders with respect to dividend payments. If a company declares a dividend, preferred shareholders must receive a certain amount of the payment, as stated on the preferred stock certificate, before common shareholders can receive a dividend distribution.
Cash Dividend Example
To illustrate how cash dividends work, assume you own 10 of the 1,000 outstanding common shares in a company that declares a $1 million dividend with a date of record of Wednesday, April 12. If the stock exchange establishes an ex-dividend date of Monday, April 10, this means that you must own the shares by the close of trading on Friday, April 7 to receive the dividend. Furthermore, calculating the dividend payment you will receive is equal to 10 divided by 1,000 and multiplying the result by the total dividend of $1 million. In this case, you are eligible for 1 percent of the dividend, which is equal to $10,000.
- U.S. Securities and Exchange Commission: Ex-Dividend Dates
- Financial Accounting; Jane L. Reimers
- Jacksonville State University: Dividend Transactions
- Polka Dot Images/Polka Dot/Getty Images