Regular cash dividends are those paid out of a company’s profits to the owners of the business (i.e., the shareholders). A company that has issued preferred stock must pay dividends on those shares before paying dividends on the common stock. The preferred stock dividend is usually set whereas the common stock dividend is determined at the discretion of the board of directors. Cash dividends are normally paid quarterly.
There are three important dates associated with dividends:
- Declaration date: The declaration date is the day the board of directors announces their intention to pay a dividend. On this day, a company creates a liability on its books; it now owes the money to the stockholders. On the declaration date, the board will also announce a date of record and a payment date.
- Record date: This date is also known as the “ex-dividend” date. It is the day on which the stockholders of record are entitled to the upcoming dividend payment. A stock will usually begin trading ex-dividend or ex-rights the fourth business day before the payment date. In other words, only the owners of the shares on or before that date will receive the dividend. If you purchased shares of Coca-Cola after the ex-dividend date, you would not receive its upcoming dividend payment; the investor from whom you purchased your shares would receive it.
- Payment date: This is the date the dividend will actually be given to the shareholders of company
The dividend yield is calculated by dividing the actual or indicated annual dividend by the current price per share.
A dividend accrual recognizes dividend income or expense that has become payable or receivable during a reporting period, but for which cash has not been paid or received in the period. Companies record a dividend accrual at the end of the month in which the ex-date occurs for those dividend payments that will be made in a subsequent month. During the dividend accrual period, a foreign currency cash dividend is subject to translational P&L.
Dividends from preferred shares take precedence over those from common shares. That is, if a preferred dividend is missed, a common dividend cannot be paid. If the preferred dividends are cumulative, then missed dividends remain in arrears until paid. Most preferred stock pays a fixed dividend, stated in a dollar amount or as a percentage of par. Outside of the U.S., payments made to owners of preferred stock are considered interest, though all other characteristics of this interest/dividend paying class of capital stock are the same. Payments made at a specified rate have preference over common stock dividend payments.
Convertible preferred is preferred stock that may be converted into a fixed number of shares of common stock, paying dividends at a specified rate and period.