American companies may periodically declare cash and/or dividends on a quarterly or yearly basis. Dividends are provided to the shareholders— otherwise referred to as stockholders—as an income stream that they can rely on. This is quite similar to a bank paying interest on certificates of de- posit (CDs) or savings accounts. There are a number of companies that boast that they have never missed a dividend or have always increased dividends.
Companies that distribute their income as dividends are usually in mature industries. You typically will not find fast-growing companies distributing dividends, as they may need the capital for future expansion and may feel they can reinvest the funds at a higher rate of return than the stockholders. As a stock trader, you need to know how this process affects your long or short investment. Basically, a company’s board of directors will decide whether to declare a dividend, which is paid out and distributed to shareholders on a date set by the company. Also, some companies will declare a special dividend from time to time. This dividend is paid out and distributed to shareholders on a date set by the company, referred to as a payable date.
In order to qualify for a dividend, you must be a shareholder on record as of the record date (the date you are “recorded” as the owner of the shares) of the dividend. You can also sell the stock as soon as the next day after the payable date and still receive the dividend.
A beginner may think this is a profitable way to buy and sell shares: Buy the shares a few days before the record date and sell them on the day after the payable date. However, before you run out and open a stock brokerage account in order to implement this tactic, you may want to con- sider that, in most cases, the stock prices will be trading lower on the day that the dividend is payable. That’s because on the dividend payable date (i.e., the date on which you get paid the dividend), the stock should trade at its regular price minus the dividend.
Let’s consider an example. If IBM (IBM) declared a $1 per share dividend payable on June 30, and closed at $90 on June 29, then on June 30, IBM would open at $89. As a stock trader, it is important to be aware of dividends and how they can affect a stock. You can find stocks declaring dividends by looking in the newspaper financial pages or at various financial web sites.