Dividends are paid to the shareholders of a company on the dividend payment date. In order to receive this payment, an investor must own the shares before the date of record, known as the ex-dividend date. The investor who owns the shares on this date is entitled to the upcoming dividend payment. Before issuing the dividend check, the board of directors must announce its intention to pay a dividend. This intention is announced on the declaration date and generally noted both the amount of the dividend and the dividend payment date.
The ex-dividend date is very important for investors buying dividend-paying stocks. Prior to this date, the stock is cum dividend, or with dividend. On or after this date, the stock is ex dividend, or without dividend. If the stock is purchased on or after this date, the investor will not be entitled to the next scheduled dividend. An investor who sells stock before this date also will not receive the scheduled dividend payment.
Some investors purchase stock just before the ex-dividend date in an attempt to capture the dividend payment with the intention of selling the stock immediately after payment. This practice is known as gaming the dividend system, and can be a profitable approach in a very strong bull market. Under normal market conditions, the value of a company will fall after the dividend payment date. The decrease in company assets is typically priced into the value of a stock.
Most companies exercise a quarterly dividend payment. Some companies pay on an annual basis. Cash dividends can be mailed as a check or direct deposited into an investor's account. Preferred shareholders are entitled to dividend payments before common shareholders, but the dividend payment date is the same for all.
Companies may also pay special one time dividends for a variety of reasons, including liquidation and events related to litigation. Special dividends can be paid in the form of cash or additional shares. One time dividend payments are announced by the board of directors along with the dividend payment date. These payments are sometimes classified as "return of capital" and are not taxable.
Dividends paid in the form of shares can be beneficial for the company and the investor. When dividends are paid in stock, the company can use the cash for other purposes. The investor does not have to pay tax on the dividend shares until sold. The shareholder seeking current income can sell the shares at any time, allowing for a do-it-yourself dividend payment date.