Dividends are one of two ways you can make money on stocks; essentially, 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.
Understanding 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.
If you sell stock you own when a dividend has accrued but not been paid out, whether or not you or the buyer gets the dividend depends on what's called the ex-dividend date, which will also be announced with the dividend. If you sell stock before that date, the buyer gets the dividend, but if you sell after, you as the seller get the dividend.
Exploring 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.
Other Important 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 often income subject to ordinary income taxes in the year they are actually paid, unless they're classified as qualified dividends and subject to capital gains tax.
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.
