- Dividends are paid out on a regular basis.
- Investors can receive dividends on an annual, quarterly or monthly basis.
- Not all dividend payments are equal, so it pays to do your homework.
How do dividend payouts work? A company that makes profits gives money to investors in the form of dividends. Dividends are a source of regular income for investors, paid annually, quarterly or even monthly.
Some, but not all, companies have a managed distribution plan. Managed distribution plans (MDPs) lay out rules dictating how and when a company will pay out its dividends. An MDP, among other stipulations, may require a company to produce earnings before paying dividends. Always check the corporate investor relations website for information about any dividend stock you are investigating.
Read on for answers about dividends, dividend distributions and how dividends pay out to investors. We'll impart in-depth knowledge of how dividends are paid and when to expect them.
How Dividends Pay Out
How do dividends work? At face value, a company that makes profits has money to give to its investors (owners), paid in the form of dividends. Dividends typically distribute to investors annually, quarterly or even monthly. Some companies pay a regular dividend amount that seldom changes; others grow their dividends.
Dividend growers, or dividend growth stocks, are among the top dividend stocks because they have a track record of regular dividend increases. The yield on the original investment always increases, which can help reduce market volatility. Dividend growth stocks tend to be tightly held stocks that don't experience the same kinds of news-driven ups and down as the broader market.
Dividends: Special Cases
There are a few special-case scenarios that dividend investors should know. The two most common are real estate investment trusts (REITs) and business development companies (BDCs). REITs invest in a portfolio of real estate-related assets such as mortgages and multi-family properties. These companies receive special tax treatment, meaning they must distribute at least 90% of taxable income as dividends. Investors can face an additional tax liability compared to ordinary dividends and a potentially volatile distribution amount. BDCs must also pay at least 90% of taxable or net investment income. Both are also known for an above-average number of monthly dividend payers.
Return of Capital
Sometimes a company will pay a dividend from funds other than current quarter earnings. In most cases, this means using retained earnings and cash on the balance sheet, but in others, it could mean a return of capital. Closed-end funds are notorious for having above-average yields and ROC, or capital return. The fund's capital, the money it invests, gets smaller with each dividend distribution, which is not a good sign. This erosion of shareholder value shows up in stock charts that are characterized by volatility and downtrends. The best dividend stocks by sector do not return capital.
Key Dividend Dates
Dividend investing is easy to do, but there are some key dates to remember. Those dates include the declaration date, the date of record, the ex-dividend date and the date of distribution. If you are interested in anything other than buying and holding your dividend stocks, you'll want to note the record date and ex-date.
The dividend declaration date is the day the company announces or declares that it will pay a dividend. The declaration date is usually in tandem with quarterly earnings but may come days or weeks later. The declaration date will include the dividend payout amount, which classes of shares will receive dividends, the date of record or record date and the distribution date or payment date.
The record date, or the date of record, is the most crucial to know in dividend investing. This is the date that the agent records owners of stock for dividend distribution. If you want to receive a company's upcoming dividend payment, you must own the stock at the end of trading on the date of record.
The ex-date, or ex-dividend date, is the day after the day of record. The ex-date is the first day the new stock owners will not receive the upcoming dividend distribution. It is worth noting that stocks tend to fall on the ex-date because of dividend harvesting. Dividend harvesting is a strategy that seeks to earn dividend income while holding stock for the shortest possible time. It is imperative to understand the difference between the ex-date and the date of record.
When are dividends paid?
On the payment date or date of distribution.
The dividend payment date is also known as the date of distribution. The payment date is the day the dividend is paid or distributed to shareholders. Ironically, investors do not have to own the stock on the payment date to receive the dividend.
How Are Dividends Paid?
Dividends are paid by the company directly to its investors. If you hold a dividend stock in your brokerage account, the distribution will be paid directly into that account.
How do stock dividends work, exactly?
You buy and hold the stock at least until the date of record and then collect the money in your brokerage account on the date of distribution. The best way to maximize distributions in an income account is to own several dividend stocks with different payment schedules. Dividend stock schedules refer to a calendar of expected dividend payments based on history and outlook.
Example of How Dividends Pay Out
Dividends are usually paid out of a company's earnings and distributed after quarterly earnings release (in most cases). It works like this:
- The business operates for a fiscal quarter producing revenue and profits.
- At the end of the quarter, executives close out the books and issue a report to investors and the SEC. The report details revenue, expenses, profits, capital plans and dividend payments.
- After and sometimes in conjunction with the quarterly earnings report, the company will issue a dividend declaration. The declaration is the intent to pay a dividend on a certain date. The declaration will include the record date, ex-dividend date and date of distribution, along with the amount and other pertinent information.
- The stock owners can receive the declared dividend payment on the record date. The only requirement for investors who want to receive the payment is to own the stock at the end of trading on the date of record.
- The company will distribute its dividend payment on the date of distribution, which is listed on the Declaration. All owners who held the stock on the date of record will receive the payment regardless of ownership status on the date of distribution.
- Payments are made automatically to investor brokerage accounts and are usually immediately available for reinvestment.
What is a Dividend Reinvestment Plan (DRIP)?
Dividend reinvestment plans, or DRIPs, compound your dividend returns to maximize your gains. To participate, investors must be owners of record and not beneficial owners. A beneficial owner owns stock in a brokerage account and receives the benefit of ownership while the brokerage remains the owner of record. As an owner of record, a beneficial owner must register with the company's agent, who then takes custody of the shares.
- Beneficial owner: A beneficial stock owner owns shares in a brokerage account. They receive the benefit of stock ownership, such as capital gains and dividends but are not owners of record. In this case, the brokerage is the owner of record and may be voting on the shares.
- Owner of record: An owner of record is registered and recorded by the company's agent. Owners of record are entitled to all benefits of ownership, including voting rights and dividends and may also participate in company-sponsored dividend reinvestment plans.
Owners of record can participate in the dividend reinvestment plan by registering with the company's agent. Once done, future dividends pay out in the form of new shares that result in larger positions. Over time, portfolios participating in DRIPs can see exponential growth and ever-increasing dividend payment amounts. To quit the program is as easy as joining, so you can choose to receive cash distributions upon retirement.
Dividends Can Provide Regular Income
Dividends are an essential part of investing. They are one of only two reasons why you should buy stocks. Average investors own stocks because of the income they provide. While most dividend-paying stocks distribute their dividends every quarter, some do so monthly, annually or irregularly. When choosing between dividend stocks, know how regularly each pays dividends. How often dividends are paid comes down to the sector, industry and individual company, so always check. Knowing when to sell dividend stocks is a matter of timing, investor preference and portfolio goals.
Have questions about dividends and how often they pay out? We have answers. Here you will find answers to the most commonly asked questions about dividend stock payments and their frequency.
How long do you have to hold dividend stocks to get paid?
Oddly enough, you can hold dividend stocks for a short time and still get paid. The shortest time is one day from the date or record to the ex-dividend Date.
How often do you get dividends from stocks?
How often are dividends paid? You get dividends from stocks as often as they pay them, which is usually quarterly. Some stocks pay every month and some pay on an annual basis.
Are stock dividends paid out monthly?
Dividends can be paid monthly but usually pay out on a quarterly basis following the release of quarterly results. Stocks that pay every month are usually structured that way intentionally and include REITs and BDCs.