When Does a Dividend Accrue?

by W D Adkins
Accrued dividends are money that's on its way to you.

Dividends are one of two ways you can make money on stocks; they are periodic payments a company gives to stockholders. The other way to make money on stocks, of course, happens when you sell shares for more than you paid for them. When a company pays dividends, you get cash periodically for as long as you own the shares. "Accrued" refers to a dividend the company's board of directors has decided to pay, but the money hasn't actually been sent out yet.

How Dividends Work

Corporations can decide to pay out some or all of their profits to shareholders. When they do, that's a dividend. Not every company does this, which isn't always a bad thing. For example, rapidly growing firms may choose to keep profits and funnel them into fueling company growth. It's up to the board of directors to decide when to distribute profits to shareholders. When the board announces it is going to pay a dividend, it's called declaring the dividend.

Accrued Dividends

A dividend is referred to as accrued when the board of directors has declared it but the payment has not actually been made to shareholders. Suppose a dividend is declared on Sept. 1. The distribution is scheduled for Sept. 30. From Sept.1 to Sept. 30, the dividend is said to be accrued.

Preferred Stock

Preferred shares are a special type of stock. A company is contractually obligated to pay a dividend amount that is determined at the time the shares are originally issued if at all possible. Some preferred shares are "cumulative." This means that if the company is forced to miss a dividend payment, the unpaid amount accrues. Any past due dividends on cumulative preferred stock must be paid when the company's fortunes improve and before any dividends on common stock can be distributed.

Considerations

You can check a company's balance sheet and other financial statements to see if there are any accrued dividends because they have to be listed as liabilities on these documents and on the company's books until paid. Another point to keep in mind is that dividend payments are considered income subject to ordinary income taxes in the year they are actually paid. However, if you sell a stock with accrued dividends, the profits from the sale are considered capital gains and may be taxed at a lower rate even if a portion of the sale price is attributable to the accrued dividend.

About the Author

Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.

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