Shareholders who purchase a company’s stocks, which are ownership shares in the company, may earn a return on their investment in the form of increased stock value or dividends. Publicly traded companies may choose to distribute dividend payments, which are portions of the company’s profits, to its shareholders. Stock exchanges and other investment services maintain dividend indices that assign points to companies based in part on the company’s payment of dividends to shareholders.
Dividends are fixed amounts that are based on a stock’s par value, which is the face value of the stock as listed on the stock certificate. For instance, a $100 stock with a par value of 6 percent would result in a $6.00 payment for each dividend period. A company may distribute its dividends to shareholders in any of several forms, including cash, property, stocks and discounts. Extra dividends and special dividends are unscheduled payments issued by the company. Companies more commonly use fixed schedules for dividend payments. Common stocks and preferred stocks pay dividends. Preferred stocks, which are less risky than common stocks, pay dividends on a fixed schedule.
Dividend Points and Indices
Financial service companies calculate and assign dividend points to rate, or weight, a group of publicly traded companies against each other or as a whole. Calculations include the number and amount of dividends paid or traded during an accrual period. Investors use the dividend point indices to research the likelihood that a company will pay dividends or to assess the risk of trading a stock's future dividend payments. Point indices are designed differently, depending on the intended use. One of the many Standard & Poor dividend point Indices uses a point system to weight 500 of the highest performing publicly traded companies. The Morningstar dividend point indices detail the performance of stocks that consistently make dividend payments and demonstrate the ability to sustain the payments.
Accrual periods and specific dates are important for dividend point calculation. Stockholders must be listed as shareholders on the company’s books by the “record date,” which is determined by the company and is also called the “date of record,” to receive the next dividends scheduled for payment. After the company sets the record date, the National Association of Securities Dealers or the stock exchanges set the “ex-dividend date,” which is also called the “ex-date.” The number and value of dividends traded or distributed before, on or after the ex-dividend date affects the indices' point calculations. The ex-dividend date, which also determines if the seller or stockholder receives the dividend, usually occurs two business days prior to the record date.
Stock Types and Dividends
Growth stocks, which do not pay dividends, are sold by new companies that need to keep most profits to support rapid growth or expansion. Companies that generate steady income streams and keep only small portions of profit, such as utility companies, sell income stocks that pay higher-than-average dividends. Countercyclical stocks are sold by companies that sell high-demand products and pay dividends even when profits are down. Billion-dollar companies with long histories of stability, profit and dividend payments sell higher-priced blue chip stocks.
- Investor.gov: Glossary
- Morningstar Indexes: Morningstar Dividend Methodology
- NOLO: Par Value
- U.S. Securities and Exchange Commission: Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposal to List and Trade S&P 500 Dividend Index Options
- U.S. Securities and Exchange Commission: Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends
- U.S. Securities and Exchange Commission. “Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends.” Accessed August 13, 2020.
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- U.S. Securities and Exchange Commission. “Real Estate Investment Trusts (REITs),” Page 1. Accessed August 13, 2020.
- Tax Foundation. “Dividend Tax Rates in Europe.” Accessed August 14, 2020.
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Gail Sessoms, a grant writer and nonprofit consultant, writes about nonprofit, small business and personal finance issues. She volunteers as a court-appointed child advocate, has a background in social services and writes about issues important to families. Sessoms holds a Bachelor of Arts degree in liberal studies.