A regular cash dividend is one of the best reasons to own stock because this dividend is like free money from the company that you own stock in. The company is basically paying you to own its stock. This a great deal. There are several different types of dividends, including the regular cash dividend.
A regular cash dividend is a cash payment by a company to its shareholders at specified times of the year. Some companies pay dividends quarterly, others twice a year and some pay only once a year.
Cash Dividend Compared to Stock Dividend
As has been noted, a cash dividend is just that--cash. On the other hand, a stock dividend means additional shares or warrants that can later be redeemed for common stock. Company leaders may pay a stock dividend because they want to pay a dividend, but cannot afford to part with the cash. A stock dividend, though it dilutes shareholders, is more cost-effective for the company paying the dividend.
How the Cash Dividend Is Paid
You may discover that your shares of Pepsi pay a dividend of $1 a share. That means shareholders will receive $1 per share per year, or 25 cents a quarter (assuming it pays a quarterly dividend). The number you see is always the annual number so be sure that you know if your stock pays a quarterly or annual dividend.
Dividends are treated as income for tax purposes and you must declare dividends received on your annual tax returns.
How Stocks Trade When a Dividend Is Paid
Dividend paying stocks have what is known as an ex date. That is the date the cash used to pay the dividend is no longer an asset and becomes a debit from the balance sheet. Generally stocks will decline on this date by the amount of their dividend, at least when trading starts for the day.
Which Is Better?
A stock dividend in theory, is superior to a cash dividend because it costs the company nothing to issue.
Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.