When you buy stock in a company, you become a partial owner, which allows you to participate in the success of the firm. Some companies reinvest their earnings, which has the potential to lead to higher share prices in the future. Other companies choose to distribute a portion of earnings directly to investors in the form of cash dividend payments. A company has no legal obligation to pay dividends; but once a dividend is announced, it becomes a legally binding obligation for the company.
Fifty percent of all long-term investment gains are derived from cash dividend payments, according to The Motley Fool. If you own stock that has increased in share price since you bought it, the only way you can realize your gains is to sell the stock. However, if the company pays dividends, you can earn money on your investment regardless of whether or not the price of the stock increased.
The declaration date is the day a company announces its intention to pay investors a dividend. Prior to this date, the company is under no obligation to make a dividend payment, but once it does, investors are provided with a legal guarantee. Once a dividend is authorized by the company's board of directors and an announcement is made to the public, it becomes a "declared dividend," which must be paid.
Following the declaration date, an ex-dividend date is established by the company's board of directors. This is the last date you can buy the stock and still legally participate in the dividend payment. If you buy the stock the day before this date, you are legally entitled to the announced dividend payment, but if you buy on or after the ex-dividend date, you will not receive a dividend payment for that quarter.
Other Important Dates
Two other dates related to dividend payments are important. The date of record is the day the company examines its investor records to determine which investors are eligible to receive a dividend. It can take up to three days before stock ownership is recorded in company records, so this date is set two business days after the ex-dividend date. The payment date is the day the company mails out dividend checks to qualified stock owners. It can take anywhere from a week to six weeks from the date of record before your broker will record your dividend payment in your stock account.
Donald Harder has been writing financial-related articles since 2000 when he founded the firm Securities Research Services. He has worked as a speech writer for the U.S. Department of Justice and written white papers and studies for the U.S. Department of Housing and Urban Development. Harder holds a Master of Arts in international affairs from George Washington University.