Table of Contents
What is a dividend and how often are they paid out?
Key dates for dividend payments
Three types of dividend policies
What are the different types of dividends?
What is a special dividend?
Are dividends taxable?
The bottom line
Jun 21, 2022
6 min read
Consistency in timing and amount of dividends is essential for many investors who rely on an income stream to support their lifestyle, others reinvest dividends.
Investors who depend on stock dividends, either for income or for reinvestment to build wealth, also depend on the calendar. These investors tend to want a reliable, regular pattern of dividend payments—and they want to know when the money will arrive.
A dividend is a financial reward that companies give to investors for owning their shares. It’s simply a slice of money that is taken from a company’s net income and passed on to shareholders. The decision of how much of that cash to take from the bottom line falls to a company’s board of directors, and it’s based on an analysis of the corporation’s profitability and needs for funds to use for reinvesting in the business.
Dividend-paying U.S. companies and mutual funds typically pay dividends on a quarterly basis. The great majority pay in cash. Non-U.S. companies have less frequent dividends, often semi-annually.
Most U.S. companies decide on the dividend after completing the quarterly income statement, and they announce each dividend in advance. The announcement includes any change in the dividend—if the company has increased or decreased the payout, and the date of payment.
Some real estate investment trusts (REITs) pay dividends monthly because much of their cash flow comes from monthly lease and mortgage payments. REITs, and master limited partnerships (MLPs), are exempt from corporate income tax as long as they pay out almost all of their earnings to shareholders as dividends.
Shareholders may prefer to receive dividend checks in the mail, but many now arrange to have dividends sent electronically by the company to their brokerage accounts.
Dividend reinvestment plans (DRIPs), offered by many companies and mutual funds, allow shareholders to convert their dividends into more company or fund shares.
Regularly scheduled dividends usually have these features:
When a company says it will pay a dividend. The announcement includes the per-share amount of quarterly dividend, the record date, and the payment date. Once a company declares a dividend, it must be paid.
When eligibility for the dividend expires. For example, if a company announces Nov. 3 that it will pay a quarterly dividend on Nov. 28, with an ex-dividend date of Nov. 10, then anyone who buys shares on or after Nov. 10 is excluded from receiving the dividend. All owners of company shares before Nov. 10 will receive the dividend.
The cutoff date is when the company completes a list of shareholders of record who are eligible. The record date is typically one or two business days after the ex-dividend date.
When the company mails dividend checks to shareholders, or electronically credits the dividends to their brokerage accounts.
Dividend-paying companies like to have some internal guidelines for how they determine dividend payouts. They call the guidelines the company dividend policy. Three are three main types of policies:
. The company wants to keep the dividend steady, trusting in long-term earnings regardless of short-term fluctuations. This is the most common policy followed among large, well-established companies, and it’s the most reliable for investors.
The company pays a constant percentage of earnings each year. This means bigger dividends in boom years and smaller (or no) dividends in lean years. Investors must be prepared for volatility in income from constant-dividend companies.
The company pays dividends only after accounting for capital expenditures and working capital. This could result in the most volatility in dividends.
Besides cash dividends, other forms of dividends include:
, also called scrip dividends, are made by issuing new shares to current shareholders, on a pro rata basis. For example, a company declaring a 5% stock dividend would issue five new shares to a holder of 100 shares; a holder of 200 shares would get 10 new shares. Stock dividends are rare.
are the distribution of shares of a subsidiary business into a separate publicly traded company, on a pro-rata basis, to current shareholders. For example, if a company has a stock price of $200 and it spins off a subsidiary that represents 25% of its revenue and earnings, shareholders would now have a company share valued at $150 and a share of the spin-off valued at $50. Spin-offs are almost always one-time events.
A special dividend is a one-time payment, separate from any regular dividends, made when a company has accumulated cash and has no immediate plans for reinvesting it or making an acquisition. The cash accumulation may come from earnings growth over time, or from the sale of company assets.
A company also may decide on a special dividend when it wants to alter its financial structure, such as reducing the equity in its debt-to-equity ratio, or it plans to spin off a subsidiary. A company may pay a special dividend in addition to its regular dividend, or pay it without having a regular dividend. Technology companies that don’t want to get locked into making regular dividend payments might choose to reward shareholders with a one-time special dividend.
Notable examples of special dividends include Microsoft’s 2004 payout of $32 billion, or $3 a share, when its regular quarterly dividend was 8 cents a share. Costco has paid four special dividends in the past decade, including the latest, $4.4 billion or $10 a share, in November 2020. Its regular dividend is 79 cents a share.
Unlike regular dividends, which are announced well in advance, special dividends are usually a surprise and payment is made quickly after the announcement. Investors who time their share purchases to qualify for receiving regular dividends and then selling the shares, a practice known as dividend capture, can’t do so with special dividends.
A dividend payment often prompts an immediate drop in a company’s share price, equivalent to the dividend amount, because cash has been shifted from the company to shareholders. A big special-dividend payout would be accompanied by a commensurate drop in share price, frustrating dividend-capture investors. Companies want special dividends to be a bonus for their long-term shareholders, not for investors jumping in and out of the stock.
Dividends are subject to taxation, but it depends on how they are classified.
, at the regular income rate or the lower long-term capital-gains rate, depending on the investor’s income bracket and the length of time the shares are owned. Most dividends qualify for the lower capital-gains rate; REIT and MLP dividends don’t.
, unless the investor sells the shares. Stock dividend payments may require the investor to hold the extra shares for a minimum period before selling.
. The spin-off doesn’t immediately increase value to the investor; shares of the spun-off company could be sold later, and any gain then would be taxable.
Investors with a focus on dividend income value companies that establish a schedule of regular payments, along with a stable dividend policy and steady growth in payouts over time. Consistency in timing and amount of dividends are essential for many investors who rely on an income stream to support their lifestyle, while others reinvest dividends for compounded growth in personal wealth. Special dividends and non-cash dividends are not part of a schedule; they may be viewed as an occasional bonus to shareholders.
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