What Is a Dividend?

A dividend is a reward for investors holding a company's stock. A company's board of directors determines the amount and frequency of these dividend distributions. Typically dividends are paid out in cash, although sometimes a company rewards its shareholders in other forms of property such as additional shares. Shareholders who own a dividend-paying stock before its ex-dividend date are generally eligible to receive the dividend.

How Do Dividends Work?

Each dividend payout must get approved by the company's board of directors. Once determined, four events occur. These events and associated dates qualify shareholders eligible to receive the dividend payout.

1. Declaration Date

The declaration date is when a company's board of directors announces its intention to pay a dividend. The dividend announcement will outline the date of record, payment date, and payout amount.

2. Ex-Dividend Date

Sometimes also called the "ex-date," the ex-dividend date is the day, set by the stock exchange, on which a shareholders eligibility to receive the dividend expires. Shareholders owning the stock one business day before the ex-dividend date are eligible to receive the compensation. Shareholders who have invested in the stock on the ex-date will not receive the declared payment and must wait until the next dividend payout.

3. Date of Record

The record date, or date of record, is the cutoff date set by the company. Your shares must be on the company's books to qualify for the upcoming dividend payment by this date.

4. Payment Date

The payment date is when dividends get credited to shareholder accounts.

How Often Are Dividends Paid?

The majority of companies issue dividends quarterly after filing earnings. However, some companies provide regular monthly, semi-annual, annual dividend payouts.

Special Dividends

Special dividends are non-recurring, one-time payments, separate from regular dividends, that a company decides to distribute to its shareholders. A company may declare a special dividend when it produces exceptional earnings and, instead of investing the excess cash back into the company, decide to reward its shareholders. Occasionally a company may declare a special dividend during financial restructuring or creating a subsidiary spin-off.

Why Do Companies Pay Dividends?

Companies issue dividends to shareholders for many different reasons. A company may issue dividends to share profits with its shareholders. They can be an incentive to reward investors for trusting and holding the company's stock.

Dividends can attract investors looking to generate passive income streams or nearing retirement. Companies that have paid a consistent dividend to their shareholders for 25 years are known as Dividend Aristocrats. Achieving this status can signal to investors the company is well-established, reliable, well-funded, and capable of continuing its dividend payouts.

Why Invest in Dividend Stocks?

Adding dividend stocks to your portfolio offers the benefit of consistent income in addition to a stock's value appreciation. While not guaranteed, large blue-chip companies with good dividend payout ratios are often considered relatively safe investments by many investors. The passive income stream they generate can help steady a portfolio during rocky times. Dividends can also help hedge against inflation as many high-quality dividend stocks will raise their dividend payouts. Reinvested dividends, whether it's through a dividend reinvestment program (DRIP) or not, can also make a clear difference to the overall performance of your portfolio in the long run.

Conclusion

A dividend is a reward to shareholders for holding a company's stock. Companies might prioritize their dividend payouts to attract investors who want to generate reliable passive income streams. You must own the shares of stock before the ex-dividend date to collect the payment. While rare, some companies issue special dividends to share in excess profits. Sometimes companies may pay dividends in other forms of property, such as shares of stock.

While many investors include growth stocks in their portfolios, some possess only dividend stocks as part of a dividend investing portfolio strategy. Regardless of your chosen portfolio strategy, dividend-paying companies may help stabilize your portfolio when the stock market becomes rocky, and reinvested dividends can make a big difference in compounding interest over time.