- Corporations pay dividends to investors from net income. You must buy and hold shares of stock before and through their ex-dividend date to receive dividends on the payable date. In general, the dividend payable date arrives one month after the ex-dividend date. Investors that purchase stock after the ex-dividend date will not receive dividends on the next payable date. Share prices typically fall by the amount of the next dividend, immediately after the ex-dividend date. At that point, buyers effectively compensate themselves for missing the next dividend payment. Contact corporate investor relations departments for specific dividend information.
- Common shares and preferred shares are classes of stock that pay dividends. In general, preferred shareholders must receive dividends before any payments are made on the common stock. Preferred dividends accumulate, and these shareholders carry rights to claim any missed dividends. In the event of bankruptcy and asset liquidations, preferred shareholders are paid prior to common shareholders. Dividends on preferred stock are typically higher than those paid out to common stockholders. Preferred shares, however, don't offer the voting rights and capital gains potential that are associated with common stock.
- For tax considerations, the Internal Revenue Service categorizes cash dividend income into ordinary and qualified dividends. As of 2010, ordinary dividends are taxed at ordinary income rates, which may be as high as 35 percent. Qualified dividends receive special tax treatment and are taxed at either 0 percent or 15 percent. For dividends to qualify, you must hold shares for at least 61 days out of the 120 days surrounding their ex-dividend date. These tax laws, part of the Jobs and Growth Tax Relief Reconciliation Act of 2003, are designed to benefit long-term investors.
- Contrary to bond interest, dividends are not tax-deductible expenses for corporations. Dividends are paid out of net income, with the remaining balance being referred to as retained earnings. Further, corporations are not legally bound to make dividend payments, as is the case with bond interest. Missed bond-interest payments would put a company into default and subject it to litigation. At that point, assets must be sold off to satisfy bondholder claims.
- Financial managers must balance the advantages of dividend payments against retained earnings when generating shareholder wealth. Growing companies generally pay minimal dividends so that more money may be reinvested into the business to exploit new profit opportunities. Conversely, larger, more mature companies carry fewer prospects for growth and capital appreciation. In these situations, investors covet higher dividend payments.
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