Dividends are corporate profits distributed to shareholders. The board of directors has the authority to pay, omit, suspend, reduce or increase dividends, which are typically paid out quarterly. A declared dividend is a dividend that will be paid but has not yet been paid to the shareholders. A paid dividend is a dividend that has been declared, paid and received by the shareholders.
Declaring the Dividend
The board of directors decides how much will be paid and when. It sets the payment and record dates. The payment date is when the dividend will be paid, and the record date establishes who will receive the dividend. Stock trades settle in three business days. Trade settlement is the transfer of stock ownership from the seller to the buyer.
To receive the dividend, an investor must be a shareholder of record. That is, his purchase must settle before the record date, otherwise the dividend will be paid to the previous owner of record.
Read More: Do Cash Dividends Declared Affect the Retained Earnings Statement?
Paying the Dividend
A dividend can be paid in cash or stock.
A cash dividend can be credited to a shareholder’s brokerage account, sent out by check or reinvested in additional shares. Many companies and brokers have dividend reinvestment programs in which the dividend is used to purchase additional full and fractional shares of stock.
In a stock dividend, the corporation issues a certain number of new shares to the existing shareholders. For example, in a 5 percent stock dividend, a shareholder of record will receive five new shares of stock for every 100 shares he owns.
Annual Dividend vs. Declared Dividend
When evaluating dividends, investors typically talk about an annual dividend, which consists of the last four quarterly dividends paid. A declared dividend is the next – or the fifth – quarterly dividend in that string.
When it is paid, it is added to the running total and the first dividend is dropped to keep a four-dividend running total. This is important because the amount of quarterly dividend can vary from quarter to quarter.
Read More: How Do Dividends Work?
Ex-Dividend Dates for Declared Dividends
To facilitate trading, brokers set ex-dividend dates based on declared dividends. If an investor buys a stock before the ex-dividend date, he will buy it with the dividend – that is, the declared dividend will be paid to him as the new shareholder of record. The ex-dividend date is the first day that a stock trades without the dividend – that is, the dividend will be paid to the previous shareholder of record.
