Dividends and splits

A dividend: the company pays its owners

A company that makes a profit has two choices for it. It can keep the money to grow the business, or it can pay part of it to its owners. The part paid out is a dividend, and it is paid as a fixed amount for each share — say $0.50 per share. If you own 100 shares, you receive $50.

US companies that pay dividends usually pay them every quarter, four times a year. Some pay monthly, some twice a year, some once. Many companies, often fast-growing ones, pay none at all.

A dividend is not a promise. The company’s board of directors decides each one. A company that has paid for years can cut its dividend, or stop it, when business gets worse.

The four dates

Every dividend comes with dates, and one of them matters more than the rest:

1. Declaration date — the board announces the dividend: how much, and when.
2. Ex-dividend date — the cut-off. You must own the share before this date to receive the dividend.
3. Record date — the company checks its list of owners. In the US today, this is usually the same day as the ex-dividend date.
4. Payment date — the money arrives in your account, often a few weeks later.

The rule to remember is the ex-dividend date. If you buy on that date or later, the person who sold the share to you receives this dividend, not you. If you already owned the share before that date, you receive it — even if you sell on the ex-date itself.

Why the price drops on the ex-date

On the ex-dividend date, the share no longer carries the right to the coming payment. A buyer that day gets a little less, so the price typically opens lower by about the amount of the dividend. Other news moves the price at the same time, so the drop is rarely exact — but it is there.

This means you cannot earn a dividend for free by buying the day before and selling the day after.

Dividend yield

To compare dividends between companies, people divide the yearly dividend by the share price. The result is the dividend yield.

With $0.50 a quarter, the yearly dividend is $2.00. At a price of $80, the yield is $2.00 ÷ $80 = 2.5%. If the price fell to $50 and the dividend stayed the same, the yield would be $2.00 ÷ $50 = 4%.

Dividends are usually taxed, and for a foreign investor some tax is often withheld before the money reaches you. The path Your first portfolio, from Azerbaijan covers this in Tax on dividends and gains.

Stock splits: more pieces, same company

Sometimes a company decides its share price has become very high and cuts each share into several. This is a stock split.

In a 2-for-1 split, every share becomes two, and the price halves. In a 3-for-1 split, every share becomes three, and the price falls to a third. Nothing else changes: the company owns the same things and earns the same profit, and its market cap is the same. Your part of the company is exactly what it was.

Your broker makes the change automatically; you do nothing. A split often makes the share easier to buy in whole units, and some investors like that, but it does not make the company worth more.

Reverse splits

A reverse split goes the other way: several shares are merged into one, and the price rises by the same factor. In a 1-for-10 reverse split, every 10 shares become one.

Exchanges set a minimum share price for a company to stay listed, and a company whose price has fallen very low may reverse-split to stay above it. That is why a reverse split often comes from a company that is struggling, though not always. If your shares do not divide evenly, the leftover fraction is usually paid out in cash.

In short

A dividend is a part of the profit paid per share; it is decided each time, and it can be cut. Own the share before the ex-dividend date to receive it, and expect the price to drop by about the dividend on that date. A split — or a reverse split — changes the number of shares and the price of each, never what your holding is worth.