Dividend-paying stocks are often a part of a balanced investment portfolio. These are companies who use some of their profits to pay out regular dividends to their shareholders. These are attractive because investors can still gain some income even if the stock is flat or down. There are four dates you need to understand for each dividend a company pays.
Most companies pay dividends quarterly, often on the same date of the dividend month -- the 10th of the month, for example. However, some companies pay dividends only twice a year and others only one each year. There are also companies that pay extra dividends irregularly.
The first step in paying a dividend comes the day the company's board of directors announces its next dividend payment. There is no particular importance to this date, but there are a couple of important pieces of information in the announcement, including the size of the dividend and the date of record for receiving it.
To receive the dividend, the company sets a date when you must be registered on the company's books as a shareholder. If you're not registered, you don't get the dividend. For shares traded on stock exchanges in the U.S. -- and in most other countries -- registration is guaranteed if you buy your shares before the ex-dividend date.
After the company sets the record date, the exchange on which the stock is traded fixes the ex-dividend date. Usually it's two business days before the record date. Stocks purchased on that day or after it are termed ex-dividend -- without dividend. Stocks purchased before the ex-dividend day are considered with dividend.
The company also sets the payment date as part of the announcement on the declaration date. That's the date the dividend gets credited to a brokerage account, or the checks get mailed to shareholders. It can be a month or more after the record date, but don't worry as you'll get the dividend even if you sell the stock in the period after the ex-dividend date and before the payment date.
Instead of cash, a company sometimes pays a dividend in shares of its stock or as a special dividend in shares of a spin-off company. In stock dividends, the ex-dividend date customarily stands as the first business date after the stock dividend is paid. That's also past the record date. However, if you sell your stock before the ex-dividend date, you are obligated to turn over any shares acquired in the dividend to the buyer of the shares you sold. Happily, that's typically handled seamlessly by your brokerage. But remember, unlike cash dividends, to receive a stock dividend you must hold the stock until the first business day after the dividend shares have been delivered.