Dividends are distributions of earnings made by a corporation to its shareholders. Dividends represent a return on investment in equity securities, corresponded in the form of cash or additional shares of stocks (stock dividends). In the latter case, the value of each share is reduced because the number of shares outstanding is increased. The decisions on the destination of profits are taken by the board of directors and constitute the so-called dividend policy of a company. In particular, dividends are not liabilities of a corporation that can also decide to retain the profits. However, when a dividend has been declared, it becomes a legal obligation of the corporation that cannot be easily rescinded. The procedure for dividend payments is structured according to the following chronology:
1. Declaration date: the board of directors declares a payment of dividends.
2. Date of record: the dividends are distributable to all individuals believed to be shareholders as of this date on the base of the notification of purchase received by the company before the specified date.
3. Ex-dividend date (also called ex-date): shares are traded ex-dividend on the day and after a number of days, commonly two or three business days, before the record date. Investors who purchase the company’s stocks on or after this date will not receive the dividend. Instead, the seller gets the dividend.
4. Date of payment: dividends are paid to shareholders of record.
The amount of dividends can be declared as dividend per share (i.e. 1$per share), as dividend yield (percentage of market price) or as dividend payout (percentage of earnings per shares).
Fabozzi F., Modigliani F., Jones F. (2010), Foundation of Financial Markets and Institutions, Pearson International Edition.
Ross Stephen A., Westerfield Randolph W., Jaffe J. (2002), Corporate Finance, McGraw Hill
Editor: Bianca GIANNINI
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