How dividends work, from declaration to payment

What is a dividend?#

Investor.gov defines a dividend as a portion of a company's profit paid to shareholders ^[1]. The SEC's guide to financial statements puts it another way: sometimes companies distribute earnings instead of retaining them, and those distributions are called dividends ^[2]. Money paid out as a dividend is money the company no longer keeps to run or grow the business.

Companies that pay dividends usually do so on a fixed schedule, such as every quarter, but they can pay at any time. A one-off payment outside the schedule is called a special or extra dividend ^[1].

Most dividends are paid in cash, but a company can also pay a dividend in stock: additional shares in the company, or shares of a subsidiary it is spinning off ^[3]. This page focuses on cash dividends on common stock. If you are new to shares themselves, start with what a stock is.

Who decides to pay a dividend?#

The board of directors decides. Under Delaware's corporation law, for example, the directors of a corporation may declare and pay dividends, subject to any limits in the company's certificate of incorporation ^[6]. The same law says where the money can come from: the company's surplus, or, if there is no surplus, its net profits for the year the dividend is declared and/or the year before ^[6]. The IRS describes dividends as being paid out of a corporation's earnings and profits ^[7].

Once the board acts, the exchange is told. The New York Stock Exchange requires its listed companies to notify it at least 10 calendar days before any record date, and at least 10 minutes before publicly announcing a dividend ^[8].

Preferred stock works differently. Preferred dividends are usually a fixed amount and are paid before any dividend on common stock ^[4].

What are the four dividend dates?#

Every cash dividend comes with four dates. The record date is the day you must be on the company's books as a shareholder to receive the dividend. For stocks, the ex-dividend date is usually the record date itself, or one business day earlier if the record date is not a business day ^[3]. Since May 28, 2024, most US securities trades settle one business day after the trade date ^[9].

Investor.gov uses this worked example for a fictional Company XYZ ^[3]:

Dates from the Investor.gov example ^[3]. Real companies set their own schedules.

Do you get the dividend if you buy just before the ex-dividend date?#

Yes. Investor.gov states the rule plainly: if you purchase before the ex-dividend date, you get the dividend; if you purchase on the ex-dividend date or after, you will not receive the next payment, and the seller gets it instead ^[3]. Selling works the other way round: sell on or after the ex-dividend date and you, as the seller, still get the dividend ^[3].

There are exceptions. If a dividend is 25% or more of the stock's value, the ex-dividend date is deferred until one business day after the dividend is paid ^[3]. Stock dividends may follow different procedures: Investor.gov gives their ex-dividend date as the first business day after the stock dividend is paid ^[3], while FINRA Rule 11140 uses the record date for stock dividends under 25% of the stock's value ^[11]. Check the company's announcement for the actual date. Our explainer on the ex-dividend date goes through these cases.

1. Find the declared dates

   Look for the company's dividend announcement, which gives the amount, record date and payment date. Quote pages may also list the ex-dividend date.

2. Compare with your trade date

   A purchase on any day before the ex-dividend date qualifies for the next dividend. A purchase on the ex-dividend date does not ^[3].

3. Check special cases

   Very large dividends (25% or more of the stock's value) use a later ex-dividend date ^[3]. For a stock dividend, read the date in the company's announcement.

4. Look for the credit on the payment date

   If your shares are held by your broker, the broker credits the dividend to your account ^[12]. Fractional shares still receive dividends ^[13].

What happens to the stock price on the ex-dividend date?#

From the ex-dividend date, a buyer no longer gets the upcoming payment ^[3]. Investor.gov says that with a significant dividend, the price of a stock may fall by that amount on the ex-dividend date ^[3]. The word "may" matters: other news can move the price on the same day.

Some orders waiting at your broker can change too. FINRA Rule 5330 requires a firm holding an open order to buy, or an open stop order to sell, to adjust it by the amount of the dividend on the day the stock is quoted ex-dividend. For cash dividends, the order price is reduced by the dividend unless the order is marked "Do Not Reduce" ^[14]. Open sell orders and stop orders to buy are exempt, as are cash dividends of less than one cent ^[14].

How are dividends taxed?#

The IRS splits dividends into two groups: ordinary dividends, which are included in ordinary income, and qualified dividends, which are taxed at the lower capital gain rates ^[7]. Holding period matters: the IRS instructions for Form 1099-DIV leave out of the qualified amount any dividend on a share held for less than 61 days during the 121-day period that began 60 days before the ex-dividend date ^[15].

You should receive a Form 1099-DIV from each payer for distributions of at least $10 ^[7]. Tax rules depend on your situation and on the type of account, so check the IRS guidance or a tax professional before acting on this summary.

Mistakes beginners make with dividends#

• Buying on the ex-dividend date

  A purchase on the ex-dividend date does not get the next dividend; the seller keeps it ^[3].

• Treating the dividend as free money

  With a significant dividend the price may drop by about the same amount on the ex-dividend date ^[3]. Buying only to collect the payment ignores that drop, and the dividend still counts as income for tax ^[7].

• Assuming the dividend is fixed

  Common stock dividends can be cut or eliminated ^[4]. A long record of payments describes the past, not the future.

• Forgetting about taxes

  Dividends in a taxable account count as income ^[7], and a dividend on shares held for less than 61 days around the ex-dividend date is not reported as qualified ^[15].

Frequently asked questions#

The bottom line#

A dividend starts with a board decision, reaches you only if you own the shares before the ex-dividend date, and, if your broker holds the shares, is credited to your account ^[12]. The price can fall by about the dividend on the ex-dividend date, the payment can be cut, and the IRS treats it as income. Before reading any stock's dividend figures, learn how dividend yield and the payout ratio are calculated, and remember that any stock can lose value.

Education only. This page is not investment, tax or legal advice. Stocks can lose value. See our risk disclosure.