How Are Dividends Declared?

Dividends — both the payment of by companies and the pursuit of stocks that pay them — have been out of favor for quite some time now. Yet, adding companies with a strong history of increasing their regular dividend payments to your portfolio can help give that extra dose of adrenaline to your investment returns.

Let's first look at where dividends come from. Then we'll discuss the process of when and how they're paid.

Where Do Dividends Come From?

To be able to pay its shareholders dividends, a company needs to make profits. Of course, certain companies have paid out dividends even when they made a loss just to keep the tradition going. As savvy investors, it's best to avoid these kinds of companies.

When a company turns a profit, it has several options with what to do with the money .... plow the money back into the business, expand by using the money to buy other businesses, pay down their debt, etc. These steps all help grow the company.

A company can also pay out some of the extra cash to its investors in the form of dividends.

The Process

The decision of whether or not to pay a dividend is made and approved by the board of directors. When the decision to pay is made, the dividends are said to be "declared". Dividends are most commonly paid out on a quarterly basis.

The dividends declared are typically communicated to the public through a press release. Here's what a sample press release would look like.....

"KROGER BOARD OF DIRECTORS DECLARES QUARTERLY DIVIDEND

CINCINNATI, Ohio, March 11, 2010 – The Kroger Co.’s (NYSE: KR) Board of Directors today declared a quarterly dividend of $0.095 per share to be paid on June 1, 2010 to shareholders of record as of the close of business on May 14, 2010.

Kroger, the nation’s largest traditional grocery retailer, employs more than 334,000 associates who serve customers in 2,468 supermarkets and multi-department stores in 31 states under two dozen local banner names including Kroger...."

As you can see, there are some important dates in the press release. For a detailed discussion of the significance of these dates, please visit our Dividend Calendar page.

In summary, we looked at what dividends are, what exactly dividends declared means, and a brief look at the dividend payment process.

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