Rules for declaring dividends

Written by christie gross
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Rules for declaring dividends
Companies need to adhere to certain rules for approving dividends. (Corporate building image by Christopher Dodge from

Some companies provide shareholders a payout to reflect the company's earnings. Companies typically make these payments on a quarterly basis every three months. The payout is called a dividend. Companies frequently pay dividends as stock or in cash although cash is the most common form of distribution. In either case, companies must follow certain rules for declaring dividends.

Obtain Board of Director Approval

A dividend is a portion of the profit left over after a company pays its expenses and tax liabilities. However, a company is not obligated to pay dividends to shareholders even when it produces a profit. The decision is ultimately made by the company and its board of directors. Company executives must obtain approval from the board of directors to pay a dividend to shareholders. The agreement becomes public record and is noted in the board meeting minutes.

Inform Shareholders

Public companies must hold at least one meeting with shareholders each year. It's at this shareholder meeting that a company announces it intends to pay a dividend. It also informs shareholders the dividend amount, the distribution date and the date used to determine who is entitled to the dividend at the time.

Report the Dividend

A company must also report a dividend to the stock exchange on which the security is traded. To report a dividend, a company must complete a form that corresponds with the dividend payout type, such as stock or cash. The form is usually sent electronically (via e-mail) to the stock exchange.

Adhere to Processing Dates

A company distributing dividends must adhere to certain processing dates. The first important date is the shareholder meeting date when the board of directors informs shareholders the company is paying a dividend. This is called the declaration date. The declaration date must occur 10 days before the dividend is recorded to comply with the federal Securities and Exchange Act of 1934. The second date of significance is the ex-date. This falls on the second business day before the distribution is recorded in the company's business records. On this date, the stock price is lowered by the stock exchange to reflect the amount of the dividend. This is because the company takes the dividend amount off its books, and the company's value decreases. Investors who purchase the stock (security) on or after this date do not receive the dividend. Conversely, an existing shareholder must retain the stock until this day passes to receive the dividend. The date of record is another important date occurring during the processing period. It's the date on which the company reviews its shareholder records to ensure it distributes payouts to the right investors.

The date of payment marks the date the company distributes the dividend. According to Investopedia, the distribution generally occurs a week or so after the date of record.

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