How Dividends Are Paid - Financial Management

In most firms, the board of directors holds quarterly or semiannual meetings to evaluate the firm’s past performance and decide the level of dividends to be paid during the next period. Changes in the amount of dividends paid tend to be made rather infrequently— especially in firms that follow a stable dividend policy —and only after there is clear evidence that the firm’s future earnings are likely to be either permanently higher or permanently lower than previously reported levels.

Most firms follow a dividend declaration and payment procedure similar to that outlined in the following paragraphs. This procedure usually revolves around a declaration date, an ex-dividend date, a record date, and a payment date.

Dividends and Earnings per Share for General Motors

Dividends and Earnings per Share for General Motors

Figure is a timeline that illustrates the Ford Motor Company’s dividend payment procedure. The firm’s board of directors meets on the declaration date—Tuesday, January 15 —to consider future dividends. They declare a dividend on that date, which will be payable to shareholders of record on the record date, Thursday, January 31. On that date, the firm makes a list from its stock transfer books of those shareholders who are eligible to receive the declared dividend.

The major stock exchanges require two business days prior to the record date for recording ownership changes. The day that begins this 2-day period is called the ex-dividend date—in this case, Tuesday, January 29. Investors who purchase stock prior to January 29 are eligible for the January 29 dividend; investors who purchase stock on or after January 29 are not entitled to the dividend. On January 29 the ex -dividend date, one would expect the stock price to decline by the amount of the dividend because this much value has been removed from the firm. Empirical evidence indicates that, on average, stock prices decline by less than the amount of the dividend on the ex -dividend day.

The payment date is normally four weeks or so after the record date—in this case,March 1. On this date, Ford makes dividend payments to the holders of record.

Dividend Reinvestment Plans

In recent years, many firms have established dividend reinvestment plans (DRIPS). Under these plans, shareholders can have their dividends automatically reinvested in additional shares of the company’s common stock. There are two types of dividend reinvestment plans. One type involves the purchase of existing stock, and the other type involves the purchase of newly issued stock.

The first type of plan is executed through a bank that, acting as a trustee, purchases the stock on the open market and then allocates it on a pro rata basis to the participating shareholders. In the second type of plan, the cash dividends of the participants are used to purchase, often at a small discount (up to 5 percent) from the market price, newly issued shares of stock.

This second type of plan enables the firm to raise substantial amounts of new equity capital over time as well as reduce the cash outflows required by dividend payments. The advantage of a dividend reinvestment plan to shareholders is that it represents a convenient method for them to purchase additional shares of the company’s common stock while saving brokerage commissions. The primary disadvantage is that shareholders must pay taxes on the cash dividends reinvested in the company, even though they never receive any cash.

Key Dates in the Ford Motor Company’s Dividend Payment

Key Dates in the Ford Motor Company’s Dividend Payment

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