Dividends

Dividends are not guaranteed and are not a contractual obligation (unlike bond interest). They are declared solely at the discretion of the board of directors. Shareholders have a right to receive dividends only if declared - no standing right to demand dividends. Dividends are paid from after-tax corporate earnings (retained earnings).

Types of Dividends

Type	Description	Tax Treatment
Cash dividends	Most common; paid in cash per share	Taxable as ordinary income or qualified dividend rate
Stock dividends	Additional shares issued to existing shareholders	Not taxable when received; adjusts cost basis
Property dividends	Non-cash assets distributed (rare)	Taxable at fair market value (FMV)

Cash Dividends

Most common form of dividend
Paid from after-tax corporate earnings
Declared by the board of directors; not guaranteed

Qualified vs Ordinary Dividends

Type	Tax Rate	Requirement
Qualified dividends	Favorable long-term capital gains rates (0%, 15%, or 20%)	Must hold stock for more than 60 days during the 121-day period around the ex-dividend date; must be paid by a U.S. corporation or qualified foreign corporation
Ordinary dividends	Taxed as ordinary income	Default treatment if holding period not met

Stock Dividends

Shareholders receive additional shares instead of cash
Increases shares outstanding; reduces price per share proportionally
No change in total shareholder value (more shares at a lower price)
Not taxed when received; only taxed when shares are later sold
Reduces cost basis per share (same total cost spread across more shares)

Example:

Own: 200 shares at $30/share = $6,000 total value
25% stock dividend: Receive 50 additional shares
After: 250 shares at $24/share = $6,000 total value
New cost basis per share: $6,000 / 250 = $24

Think of it this way: A stock dividend is like cutting a pizza into more slices. You have more pieces, but the same amount of pizza. Your percentage ownership of the company stays exactly the same.

Exam Tip: Gotchas

Stock dividends are not taxable when received. Tax is owed only when those shares are later sold. Cost basis per share decreases because the same total cost is spread across more shares.

Key Dividend Dates

Four dates matter when a company declares a dividend:

Date	Significance
Declaration date	Board of directors announces the dividend (amount, record date, payment date)
Ex-dividend date	First date a buyer will NOT receive the declared dividend; stock price typically drops by approximately the dividend amount
Record date	Shareholders on the company's books as of this date receive the dividend
Payment (payable) date	Dividend is actually paid to shareholders of record

Ex-Dividend Date Mechanics (T+1 Settlement)

Under current T+1 settlement (effective May 28, 2024), the ex-dividend date is typically the same day as the record date
To receive the dividend, you must purchase the stock before the ex-dividend date
On the ex-date, the stock trades "ex-dividend" and the price typically opens lower by the dividend amount

Think of it this way: Stock trades take one business day to settle (T+1). The ex-date is the record date itself, so buying before the ex-date gives your trade time to settle and register your ownership by the record date.

Exam Tip: Gotchas

Buying on the ex-date means no dividend. To receive the dividend, you must buy before the ex-dividend date.

Preferred Stock Dividends

Cumulative preferred - unpaid dividends accumulate as arrearages; all arrearages must be paid before any common dividends
Non-cumulative preferred - missed dividends are lost forever; no accumulation
Participating preferred - receives stated dividend PLUS a share of additional profits beyond a specified threshold

Exam Tip: Gotchas

Cumulative preferred arrearages must be paid in full before common stockholders receive any dividend. This is the single most tested preferred stock dividend concept.

Stockholders do NOT vote on dividends; only the board of directors declares them.