Dividend

A dividend is a payment that a company makes to its shareholders out of its profits or accumulated reserves. It is usually paid in cash as a fixed amount per share, and the decision to pay it, and how much, is taken by the board of directors. Dividends are one of the two ways an owner of shares earns a return; the other is a rise in the share price, and together they make up total return.

Holders of common stock have no automatic right to a dividend: the board can raise, cut or suspend it. Holders of preferred stock are usually promised a fixed dividend, often stated as a percentage of par value, which must be paid before anything goes to ordinary shareholders. Investment funds also pass on the income they receive to their own investors, and those payments are called dividends or income distributions too.

Picture a group of friends who together own a bakery. At the end of a good year there is money left over after paying staff, suppliers and the bank. They can keep it in the business to buy a new oven, or they can share some of it out, each taking an amount in proportion to the stake they own. The amount shared out is the dividend.

Large companies do the same thing on a bigger scale. A board that expects few good uses for spare cash tends to pay more of it out; a young company that sees plenty of chances to grow usually pays little or nothing and reinvests instead.

A cash dividend on a listed share passes through four dates:

1. The declaration date, when the board announces the amount and the other dates.
2. The ex-dividend date, the first day on which the shares trade without the right to this dividend.
3. The record date, when the company, through its transfer agent or registrar, fixes the list of holders who will be paid.
4. The payment date, when the cash reaches holders' accounts.

Because ownership changes only when a trade reaches settlement, the ex-date depends on the settlement cycle. In the United States, which moved to one-day (T+1) settlement on 28 May 2024, the ex-date for an ordinary cash dividend is normally the same business day as the record date.

• Regular dividends are paid on a set schedule. US companies typically pay quarterly; UK and many European companies pay an interim dividend during the year and a final dividend approved by shareholders at the annual meeting.
• Special dividends are one-off payments, often after an asset sale or an unusually profitable year.
• Stock (or scrip) dividends are paid in new shares instead of cash, and some companies let holders choose between the two.
• Preferred dividends are fixed payments on preferred shares; if they are cumulative, any missed payments must be made up before ordinary dividends resume.
• Fund distributions from a mutual fund or ETF are split between income dividends and capital gains distributions, which are taxed differently.

The share of profit paid out is measured by the payout ratio:

A company that pays 1.20 a share from earnings per share of 3.00 has a payout ratio of $1.20 \div 3.00 = 40\%$. Mature blue-chip companies often aim for steady, gradually rising dividends, because markets tend to read a cut as a sign of trouble. Economists Merton Miller and Franco Modigliani argued in 1961 that, in a world without taxes or trading costs, dividend policy should not affect a firm's value; in practice taxes, signalling and investor preferences make it matter.

Share buybacks are the main alternative way of returning cash. Since 1 January 2023 US public companies pay a 1% excise tax on the net value of shares they repurchase. Dividends are also limited by company law: in the UK they may only be paid from distributable profits under Part 23 of the Companies Act 2006, and US state laws, such as Delaware's, restrict payments to surplus or recent profits so that creditors are not left short.

In the United States, dividends are reported on Form 1099-DIV. "Qualified" dividends, broadly those from US companies and qualifying foreign companies on shares held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date, are taxed at the long-term capital gains rates of 0%, 15% or 20%, plus the 3.8% net investment income tax for higher earners. Other "ordinary" dividends are taxed as regular income. Dividends received inside an individual retirement account are not taxed when paid.

Cross-border investors usually face a withholding tax in the company's home country, 30% by default in the United States, often reduced under double taxation treaties. In the UK, individuals have a tax-free dividend allowance, which has been £500 a year since April 2024. Many investors favour dividends as a source of passive income, while others reinvest them; the dividend yield measures the income relative to the share price, and dividend reinvestment plans turn the cash back into shares automatically.

• Investor.gov (SEC): Dividend
• Internal Revenue Service: Topic no. 404, Dividends