There are different kind of dividends available such as cash dividends, property dividends, stock dividends, and liquidating dividends. Dividends will play an important role in any investment portfolio and it is important to get a full understanding of them.
Companies that earn a profit can do one of three things: pay that profit out to shareholders, reinvest it in the business through expansion, debt reduction or share repurchases, or both. When a portion of the profit is paid out to shareholders, the payment is known as a dividend. For many investors, "living off dividends" is the ultimate goal.
Dividends must be declared:
(i.e., approved) by a company’s Board of Directors each time they are paid. There are three important dates to remember regarding dividends.
The declaration date is the day the Board of Directors announces their intention to pay a dividend. On this day, the company creates a liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date.
Date of record:
This date is also known as “ex-dividend” date. It is the day upon which the stockholders of record are entitled to the upcoming dividend payment. According to Barron’s, a stock will usually begin trading ex-dividend or ex-rights the fourth business day before the payment date. In other words, only the owners of the shares on or before that date will receive the dividend. If you purchased shares of Coca-Cola after the ex-dividend date, you would not receive its upcoming dividend payment; the investor from whom you purchased your shares would.
This is the date the dividend will actually be given to the shareholders of the company.
A vast majority of dividends are paid four times a year on a quarterly basis. This means that when an investor sees that, for example, Coca-Cola pays a $0.88 dividend, he or she will actually receive $0.22 per share four times a year. Some companies, such as McDonald’s, pay dividends on an annual basis.