Q:

How do dividends work?

A:

Quick Answer

Dividends are a distribution of company earnings, often in the form of cash, to shareholders of record on the must-own date. If a company pays a quarterly dividend of 10 cents per share, an investor with 500 shares would receive a dividend of $50.

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Full Answer

Companies issue dividends to share earnings with investors and to attract and retain investors who appreciate the ongoing dividend income. Dividends are issued on a monthly, quarterly or annual basis. A company might declare an annual dividend of 40 cents, but it is paid out in quarterly payments of 10 cents. The date on which a dividend is announced is known as the declaration date.

The execution date is the date whereon the payments are actually issued to shareholders of record on the must-own date. Someone could purchase shares in a stock near the close of trading on the must-own date and receive the distribution on the execution date. By contrast, someone could own shares for months and dump them the morning of the must-own date, thus losing out on the distribution.

An alternative to a cash dividend is a stock dividend, wherein companies issue additional shares of stock on the execution date. Companies do this to share earnings while preserving cash.

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