A stock company can elect to distribute some of its earnings to its shareholders in the form of dividends. When it comes to dividend payments, all shares within the same class of shares must be treated equally.
Important: This article is about dividends from stock companies. Certain other investments, including mutual funds (MF) and exchange traded funds (ETF), can also yeild dividends, but that is beyond the scope of this article.
Who decides about dividends?
It is the board of directors that suggests the payment of dividends, but they are not allowed to make any dividend payouts without first having the approval of the shareholders.
Is dividends always money?
Dividends are usually money, but they can be almost any asset. A company can, for instance, elect to give out shares of stock as dividends, or other property belonging to the company.
In some jurisdictions, the tax laws make it extra appealing to invest in dividend stocks. There are jurisdictions that allows for low (or even zero) taxation on dividends. This can be especially important for investors concerned about staying within their current tax bracket and not being bumped up to a higher one.
Two examples of countries that have a comparatively low tax on dividend income for shareholders are the United States and Canada.
An example of a country with zero tax on a shareholder’s dividend income is India.
Investing in dividend paying stock companies
We don’t have a crystal ball capable of telling us what they future will look like, but some companies are much more likely to pay dividends than others. If you are interested in adding dividend-earning shares to your investment portfolio, look for companies with an established track record of paying regular dividends. Generally speaking, this will be large and mature companies. Start-ups are much less likely to pay dividends, and the same is true for high-growth companies where company assets are required to fund the growth.
Examples of companies known to pay dividends at a scheduled frequency are Walmart Inc (WMT), Microsoft Corp. (MSFT) and Unilever PLC ADR (UL) who all pay quarterly dividends.
Examples of sectors known to include plenty of notable dividend-paying companies:
- Oil & Gas
- Basic materials
- Healthcare & Pharmaceuticals
- Banking & Finance
In the United States, Master Limited Partnerships (MLP:s) and Real Estate Investment Truts (REIT) have to make specified distributions to shareholders. Therefore, these types of companies tend to be notable dividend payers.
In most jurisdictions, the process of dividend payment will follow a fairly strict and predictable chronological order. Here are some important terms to know about:
This is the date on which the company management announces the dividends.
Ex-dividend date (ex-date)
The date on which the dividend eligibility expires.
Example: The ex-date for the share is 1st of May. If you purchase the share on this date or later, you are not eligible for the dividend. The dividend will go to whoever owned the share one business day prior to the ex-date.
The date on which the company issues the payment of dividends.
Non-recurring dividends (special dividends)
As mentioned above, it is quite common for dividend paying companies to pay dividends at a predictable pattern, e.g. quarterly dividends or annual dividends.
It is however also possible for a company to make a non-recurring dividend payment, also known as a special dividend. One example of a special dividend payment that garnered quite a lot of attention was the special $3.00 per share dividend paid by the Microsoft Corp. in 2004. This was done in addition to the company’s more predictable quarterly dividend payments. The reason for the special dividend was unusually strong business performance and an improved financial outlook. Notably, the corporation’s quarterly dividends at the time were typically in the 8-16 cents per share range, so 3 dollars per share was quite a leap.