Stocks - Dividends Explained

[zekthecat]

I just wanted to put this out there for people interested in dividend stocks.
To get the dividends from a company dosen't mean that you have to hold onto a company for a long period of time, it just means that you have to buy in at the RIGHT time. This will also touch breifly on the tax implications. I hope this will help some CATS out there to look at dividens as a way to make some money without to much fear of lossing money. Most companies that pay dividends are BIG BOARD companies and the price flux isn't as dramatic as micro stocks.


A company may periodically declare cash and/or stock dividends. This article deals with cash dividends on common stock. Two paragraphs also discuss dividends on Mutual Fund shares.

The Board of Directors of a company decides if it will declare a dividend, how often it will declare it, and the dates associated with the dividend. Quarterly payment of dividends is very common, annually or semiannually is less common, and many companies don't pay dividends at all. Other companies from time to time will declare an extra or special dividend. Mutual funds sometimes declare a year-end dividend and maybe one or more other dividends.

If the Board declares a dividend, it will announce that the dividend (of a set amount) will be paid to shareholders of record as of the RECORD DATE and will be paid or distributed on the DISTRIBUTION DATE (sometimes called the Payable Date).

Before we begin the discussion of dates and date cutoffs, it's important to note that three-day settlements (T+3) became effective 7 June 1995. In other words, the SEC's T+3 rule states that all stock trades must be settled within 3 business days.

In order to be a shareholder of record on the RECORD DATE you must own the shares on that date (when the books close for that day). Since virtually all stock trades by brokers on exchanges are settled in 3 (business) days, you must buy the shares at least 3 days before the RECORD DATE in order to be the shareholder of record on the RECORD DATE. So the (RECORD DATE - 3 days) is the day that the shareholder of record needs to own the stock to collect the dividend. He can sell it the very next day and still get the dividend.

If you bought it at least 3 business days before the RECORD date and still owned it at the end of the RECORD DATE, you get the dividend. (Even if you ask your broker to sell it the day after the (RECORD DATE - 3 days), it will not have settled until after the RECORD DATE so you will own it on the RECORD DATE.)

So someone who buys the stock on the (RECORD DATE - 2 days) does not get the dividend. A stock paying a 50c quarterly dividend might well be expected to trade for 50c less on that date, all things being equal. In other words, it trades for its previous price, EXcept for the DIVidend. So the (RECORD DATE - 2 days) is often called the EX-DIV date. In the financial listings, that is indicated by an x.

How can you try to predict what the dividend will be before it is declared?

Many companies declare regular dividends every quarter, so if you look at the last dividend paid, you can guess the next dividend will be the same. Exception: when the Board of IBM, for example, announces it can no longer guarantee to maintain the dividend, you might well expect the dividend to drop, drastically, next quarter. The financial listings in the newspapers show the expected annual dividend, and other listings show the dividends declared by Boards of directors the previous day, along with their dates.

Other companies declare less regular dividends, so try to look at how well the company seems to be doing. Companies whose shares trade as ADRs (American Depositary Receipts -- see article elsewhere in this FAQ) are very dependent on currency market fluctuations, so will pay differing amounts from time to time.

Some companies may be temporarily prohibited from paying dividends on their common stock, usually because they have missed payments on their bonds and/or preferred stock.

On the DISTRIBUTION DATE shareholders of record on the RECORD date will get the dividend. If you own the shares yourself, the company will mail you a check. If you participate in a DRIP (Dividend ReInvestment Plan, see article on DRIPs elsewhere in this FAQ) and elect to reinvest the dividend, you will have the dividend credited to your DRIP account and purchase shares, and if your stock is held by your broker for you, the broker will receive the dividend from the company and credit it to your account.

Dividends on preferred stock work very much like common stock, except they are much more predictable.

Tax implications:


Some Mutual Funds may delay paying their year-end dividend until early January. However, the IRS requires that those dividends be constructively paid at the end of the previous year. So in these cases, you might find that a dividend paid in January was included in the previous year's 1099-DIV.

Sometime before January 31 of the next year, whoever paid the dividend will send you and the IRS a Form 1099-DIV to help you report this dividend income to the IRS.

Sometimes -- often with Mutual Funds -- a portion of the dividend might be treated as a non-taxable distribution or as a capital gains distribution. The 1099-DIV will list the Gross Dividends (in line 1a) and will also list any non-taxable and capital gains distributions. Enter the Gross Dividends (line 1a) on Schedule B.

Subtract the non-taxable distributions as shown on Schedule B and decrease your cost basis in that stock by the amount of non-taxable distributions (but not below a cost basis of zero -- you can deduct non-taxable distributions only while the running cost basis is positive.) Deduct the capital gains distributions as shown on Schedule B, and then add them back in on Schedule D if you file Schedule D, else on the front of Form 1040.
Finally, just a bit of accounting information. Earnings are always calculated first, and then the directors of a company decide what to do with those earnings. They can distribute the earnings to the stockholders in the form of dividends, retain the earnings, or take the money and head for Brazil (NB: the last option tends to make the stockholders angry and get the local district attorney on the case :-). Utilities and seasonal companies often pay out dividends that exceed earnings - this tends to prop up the stock price nicely - but of course no company can do that year after year.

[BadThad]

Excellent and well written! The perfect sticky thread! :D

Thanks Zek

[Foxtrot]

When I was a kid our dad gave each of us 45 shares of ATT. Well we used to get a check every quarter for $29. We had to put it in the bank. When we turned 22 we got our stuff. I the oldest decided to ask my dad for the cash value rather than the stock. So I got my money, got a real nice paint job on my 65 low rider and a few other things.
Time went by, a few years ago, just befor the tech bust on wall street I was talking with one of my sisters and asked what her stock was worth now, she said, oh the last time I checked about $100,000
Well I still have that low rider but have since painted it again. That is my experience with dividends. I hear now that utility companies like Baltimore Gas Electric pay nice divis.

[BadThad]

Originally Posted by Foxtrot

When I was a kid our dad gave each of us 45 shares of ATT. Well we used to get a check every quarter for $29. We had to put it in the bank. When we turned 22 we got our stuff. I the oldest decided to ask my dad for the cash value rather than the stock. So I got my money, got a real nice paint job on my 65 low rider and a few other things.
Time went by, a few years ago, just befor the tech bust on wall street I was talking with one of my sisters and asked what her stock was worth now, she said, oh the last time I checked about $100,000
Well I still have that low rider but have since painted it again. That is my experience with dividends. I hear now that utility companies like Baltimore Gas Electric pay nice divis.

Man oh man, lol. Good story even though you sold.

[Ciao]

Thanks Zetthecat for your post

I was going to ask few questions on div. but there are already the answers.

Over here as long as you got the share the day before you get the div. paid
(each company pay a different length of time) normally between 1 to 5 weeks
but past the Div date you can sell the share and get paid late (when the date is due)

all div. are paid where the account is held less 12.5% tax
(same as Capital Gain 12.5% but with CG one can deduct the losses)

how much tax do you pay?

I trade in the UK and the div I used to get I paid UK tax of 12.5% plus an Italian tax of 12.5% = 25%!!!
which in turn go to my total earning and get another 12.5% CG!!! :mad:
needless to say I give up chasing the div…. I was wandering if in USA was the same

Many years ago I used to get a div from “Lucent” but at that time all div where tax exception


how much tax + CG (shares) do you pay in USA?

[zekthecat]

Ciao,
Here is what the IRA web site says about taxes on dividends.... Hope this will help you out. If not let me know and I will explain it more. BTW what part of Italy are you in.

TITLE III
REDUCTION IN TAXES ON DIVIDENDS AND CAPITAL GAINS

Sec. 301 Reduction in capital gains rates for individuals; repeal of 5-year holding period requirement
The Act reduces the current 20- and 10-percent rates on the adjusted net capital gain to 15 and 5 percent, respectively, effective in taxable years ending on or after May 6, 2003, and beginning before January 1, 2009. For taxable years beginning in 2008 only, the 10-percent rate is reduced to zero. These lower rates apply to both the regular tax and the alternative minimum tax. For taxable years that include May 6, 2003, the lower rates apply to amounts properly taken into account for the portion of the year on or after that date. This generally has the effect of applying the lower rates to capital assets sold or exchanged (and installment payments received) on or after May 6, 2003.

Sec. 302 Dividends of individuals taxed at capital gain rates
Under the Act, dividends received by an individual shareholder from domestic and qualified foreign corporations generally are taxed at the same rates that apply to capital gains. This treatment applies for purposes of both the regular tax and the alternative minimum tax. Thus, under the provision, dividends are taxed at rates of 5 (zero, in 2008) and 15 percent. The provision applies to dividends received in taxable years beginning after 2002 and before 2009.

To qualify for the capital gains rates, the shareholder must own the stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date. Also, the capital gain rates are not available for dividends to the extent that the taxpayer is obligated to make related payments with respect to positions in substantially similar or related property. Other anti-abuse rules apply.

[Ciao]

Thanks "Zek"
I shall “study” it later on, the Italian market open in 20 minutes… I am late for my daily strategies…

I live in a hill, 5 miles from the sea, in the Riviera dei Fiori near San Remo and the French Còte d’Azur few miles from Monte Carlo
Somewhere on this mop …
the link didn't work...

[BadThad]

Originally Posted by Ciao

Thanks Zetthecat for your post

I was going to ask few questions on div. but there are already the answers.

Over here as long as you got the share the day before you get the div. paid
(each company pay a different length of time) normally between 1 to 5 weeks
but past the Div date you can sell the share and get paid late (when the date is due)

all div. are paid where the account is held less 12.5% tax
(same as Capital Gain 12.5% but with CG one can deduct the losses)

how much tax do you pay?

I trade in the UK and the div I used to get I paid UK tax of 12.5% plus an Italian tax of 12.5% = 25%!!!
which in turn go to my total earning and get another 12.5% CG!!! :mad:
needless to say I give up chasing the div…. I was wandering if in USA was the same

Many years ago I used to get a div from “Lucent” but at that time all div where tax exception


how much tax + CG (shares) do you pay in USA?

Holy Smokes! That's a lot of taxation! Can you "write off" your losses?

[daiello]

I took a finance class last semester, or maybe it was investment principles and is it true to see a decline in PPS once dividends are given out?

I think i was told this in class, but i forget if thats what was said.

If anyone has any idea what im talking about, help me out haha. thanks.

[CatFish]

no cash dividends. stock dividends yes pps will drop most of the time