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Updated: Aug 25, at PM. A Fool since , he began contributing to Fool. This practice is known as dividend reinvestment; it is commonly offered as a dividend reinvestment plan DRIP option by individual companies and mutual funds. Dividends are always considered taxable income by the Internal Revenue System IRS regardless of the form in which they are paid.
If a dividend is declared, all qualified shareholders of the company are notified via a press release; the information is usually reported through major stock quoting services for easy reference.
The key dates that an investor should look for are:. On the payment date, the company deposits the funds for disbursement to shareholders with the Depository Trust Company DTC. Cash payments are then disbursed by the DTC to brokerage firms around the world where shareholders hold the company's shares. The recipient firms appropriately apply cash dividends to client accounts, or process reinvestment transactions, as per a client's instructions.
Tax implications for the dividend payments vary depending on the type of dividend declared, account type where the shareholder owns the shares, and how long the shareholder has owned the shares. Dividend payments are summarized for each tax year on Form DIV for tax purposes.
Once a dividend is declared on the declaration date, the company has a legal responsibility to pay it. A dividend reinvestment plan DRIP offers a number of advantages to investors. If the investor prefers to simply add to their current equity holdings with any additional funds from dividend payments, automatic dividend reinvestment simplifies this process as opposed to receiving the dividend payment in cash and then using the cash to purchase additional shares.
Company-operated DRIPs are usually commission-free, since they bypass using a broker. This feature is particularly appealing to small investors since commission fees are proportionately larger for smaller purchases of stock. Another potential benefit of DRIPs is that some companies offer stockholders the option to purchase additional shares in cash at a discount. Dividends are a way for companies to distribute profits to shareholders, but not all companies pay dividends. Some companies decide to retain their earnings to re-invest for growth opportunities instead.
If dividends are paid, a company will declare the amount of the dividend, and all holders of the stock by the ex-date will be paid accordingly on the subsequent payment date.
Investors who receive dividends may decide to keep them as cash or reinvest them in order to accumulate more shares. Dividend Stocks. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
These choices will be signaled globally to our partners and will not affect browsing data. This means anyone who bought the stock on Friday or after would not get the dividend.
At the same time, those who purchase before the ex-dividend date on Friday will receive the dividend. With a significant dividend, the price of a stock may fall by that amount on the ex-dividend date. In these cases, the ex-dividend date will be deferred until one business day after the dividend is paid.
Sometimes a company pays a dividend in the form of stock rather than cash. The stock dividend may be additional shares in the company or in a subsidiary being spun off. The procedures for stock dividends may be different from cash dividends. The ex-dividend date is set the first business day after the stock dividend is paid and is also after the record date. If you sell your stock before the ex-dividend date, you also are selling away your right to the stock dividend.
Your sale includes an obligation to deliver any shares acquired as a result of the dividend to the buyer of your shares, since the seller will receive an I. Thus, it is important to remember that the day you can sell your shares without being obligated to deliver the additional shares is not the first business day after the record date, but usually is the first business day after the stock dividend is paid.
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