This article is from the Investing Articles: Stocks and Options series.
A dividend's yield -- the
percentage of return earned strictly from dividends -- is equal
to total dividends paid in the last 12 months divided by the
current stock price. So if a stock is trading at $20 per share and
has paid a 25 cent dividend for each of the past four quarters,
its yield is $1 divided by $20, or 5 percent.
Companies pay dividends as a demonstration of financial health and as a way of increasing shareholder allegiance. However, not all companies pay dividends. Many firms keep their earnings and reinvest them in the business, reasoning that they can increase shareholder value more rapidly by fueling growth than by handing out cash. Firms opposed to dividends also argue that retaining earnings is a more tax-efficient strategy, since dividends are taxed as ordinary income, while any growth fueled by reinvesting earnings is generally taxed at more favorable long-term capital gains rates.
A corporation's board of director's is responsible for declaring a cash dividend. Once a dividend has been declared, a 'date of record' or 'record date' is established. The 'record date' means that stockholders on record on or before that date are entitled to the dividend. Anyone buying the stock after that date must wait until the next dividend is declared to receive a dividend.