Cash dividend

A cash dividend is a payment of company profits to shareholders in cash, as opposed to a stock dividend (paid in additional shares) or other property. Dividends are declared by the board of directors — no company is obligated to pay one, but established, profitable companies often pay a regular quarterly dividend, and each stockholder receives a pro rata share based on the shares they own.

Four dates govern every cash dividend. On the declaration date, the board announces the dividend. The record date is when the company checks its books — you must be a shareholder of record to be paid. The ex-dividend date (ex-date) is the first day a stock trades without the dividend attached; it's set based on the settlement cycle so that anyone buying on or after the ex-date settles too late to make the record date. Finally, the payable date is when the money actually goes out. On the ex-date, the stock's price is reduced by the dividend amount, since new buyers no longer receive it.

Cash dividends matter to investors as income and as a signal of financial health, but they carry tax consequences: dividends are taxable in the year received, with qualified dividends (those meeting holding period requirements) taxed at lower long-term capital gains rates and non-qualified dividends taxed as ordinary income.

Cash dividends are tested throughout the SIE, Series 7, and Series 66 exams. Master the sequence of dividend dates — often remembered as DERP: declaration, ex-date, record, payable — plus who is entitled to a dividend on a given trade date and how dividends are taxed.