How And When Are Dividends Paid?

How Are Dividends Paid?

In the previous lesson of this dividend investing course, I outlined that a dividend is a payment that shareholders receive for their investment in a company. A cash dividend is paid via a check or, more commonly, received directly in the bank or brokerage account where you purchased the stock.

Companies usually distribute dividends in the form of cash but sometimes opt to do a stock dividend. In this case, a company distributes profits in the form of additional shares instead of delivering cash. There are many reasons why a company could decide to distribute additional shares instead of cash, and we will analyze them deeper in the stock dividend lesson.

Dividends are paid on a per-share basis, so the dividend amount you get depends on the number of shares you own. For example, Apple currently distributes a $0.82 quarterly dividend per-share. Thus, if you own ten (10) shares, you'll get $8.20 each quarter.

To find information about a company's dividend, you can use the Finbox dividend analysis tool to access data for 100,000+ companies around the world.

how are dividends paid - using finbox tools

When Are Dividends Paid?

Most companies pay dividends every quarter (in line with earnings reports), while some pay it annually, semi-annually (twice a year), or monthly. As discussed in the first lesson about dividends, the dividend frequency depends on the type of company:

For some companies, such as REITs (Real Estate Investment Trust), it's reasonable to distribute a monthly dividend because they collect payment from their customers on a monthly basis. Companies in other sectors like Consumer Discretionary, where revenue is not evenly spaced throughout the year, tend to pay quarterly dividends.

Using the Finbox stock screener, I ran a screen for constituents of the S&P 500 Index. After exporting the results, I created a tally based on the dividend frequency. As of July 2020, there are 393 dividend-paying stocks in the S&P 500 Index. Of the 393 stocks, approximately 381 pay dividends quarterly, six semi-annually, three annually, two monthly, and one on an irregular basis.

Pro Tip: You can use the Finbox Data Explorer to access dividend frequency data for 100,000+ companies worldwide for free!

The dividend payment date is announced by the company when it declares the dividend (declaration date). However, to be entitled to the payment, an investor must own the stock before the ex-dividend date.

when are dividends paid - dividend schedule infographic

Declaration Date

The declaration date, also known as the announcement date, is the day that the company's board of directors declares the next dividend. In addition to the next dividend payment date, the company informs its shareholders of the dividend's amount and the ex-dividend date.

When a company declares a dividend, it assumes the legal liability to distribute it to shareholders and must record a dividend payable account on the liabilities section on the balance sheet. When the company pays the dividend, it removes the current liability, and cash goes down by the same amount. Let's make things clear with an example:

BoxFin Inc. Corporation announces a dividend of $0.10/share. Since 100,000 shares are outstanding, it records a dividend payable account of $10,000 on the balance sheet's liabilities section. When the company pays the dividend, it reduces the dividend payable account by $10,000 while cash goes down by the same amount.

Ex-Dividend Date

The ex-dividend date is the most important of the four dates because it determines which shareholders will be qualified to get the dividend. Only shareholders who own the stock as of the ex-dividend date receive the dividend.

The stock price is adjusted by the amount of the dividend on the ex-dividend date. Since only investors who own the stock before the ex-dividend date receive the dividend, investors purchasing shares after the ex-dividend date pay the dividend-adjusted price.

For example, let assume Apple pays a $0.82/share quarterly dividend. If Apple's stock price is $300.12/share at the close of trading on the ex-dividend date, the adjusted close price would be $299.30/share.

Record Date

The record date is when the company settles the shareholders of record list. In most countries, this is an automatic process, and investors who bought the stock before the ex-dividend date will be recorded in the list and be entitled to receive the dividend.

So why is the record date important? Since stockholders of publicly-traded companies change on a daily basis, the company must settle a definite list of shareholders entitled to the dividend.

So how do you know if you are on the shareholders of record list? The company records only investors who bought the stock two business days before the record date because of the T+2 settlement rule. According to the rule, a stock transaction settles two business days after the trade date. As explained on the SEC website:

T+2 means that when you buy a security, your payment must be received by your brokerage firm no later than two business days after the trade is executed. When you sell a security, you must deliver your securities certificate to your brokerage firm no later than two business days after the sale.

Payment Date

As the name suggests, eligible shareholders receive the declared dividend on the payment date. The payment date can be as much as a month after the record date.

As discussed previously, when the company pays the dividend, it reduces the dividend payable account on the balance sheet's liabilities section, and cash goes down by the same amount.

Dividend Payment: A Practical Example

To illustrate, we can use a practical example of a real company. Nike's board of directors (NYSE:NKE) announced a cash dividend of $0.28/share on November 20, 2020. In addition to the dividend amount, the company informs its shareholders of the ex-dividend date: December 4, 2020.

Only shareholders who own the stock as of the ex-dividend date receive the dividend on the payment date, which is December 29, 2020. You can find this information on any public company in the world using the Finbox Data Explorer, as shown below:

Dividend Reinvestment Plan (DRIP)

As discussed above, companies usually distribute dividends in the form of cash while sometimes opt for a stock dividend. A cash dividend is paid via a check or, more commonly, received directly in the bank or brokerage account where the investor purchased the stock. With a stock dividend, the company distributes profits in additional shares instead of delivering cash.

An effective alternative to the most common cash and stock dividends is the dividend reinvestment plan (DRIP), which allows investors to automatically reinvest the dividend to get more shares instead of collecting the cash dividend payment and then using it to purchase new shares.

The main advantage for investors is that dividend reinvestment plans are usually commission-free because they bypass the broker. This feature especially appeals to small investors as commission fees are proportionately higher for smaller transactions. Another benefit of DRIP is that some firms offer shareholders the opportunity to get new shares at a discount.