The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

DIVIDENDS

A dividend is the cash, stock, or any type of property a corporation distributes to its shareholders. The board of directors may declare a dividend at any time, but dividends are not a legal obligation of the corporation—it is the choice of the board of directors. Unlike interest on debt securities, if a corporation does not pay a dividend, there is no violation of a contract, nor any legal recourse for shareholders.

When the board of directors declares a distribution, it specifies the amount of the distribution, the date on which the distribution is paid, and the date of record, which determines who has the right to the distributions. Because shares are traded frequently and it takes time to process transactions, the exchanges have devised a way of determining which investors receive the dividend: the exchanges take the record date, as specified by the board of directors, and identify the ex dividend date, which is two business days prior to the record date. The ex dividend date is often referred to simply as the ex date.

The cash dividends that a corporation pays is described in terms of dividend per share, calculated as follows:

Another way of describing cash dividends is in terms of the percentage of earnings paid out in dividends, which we refer to as the dividend payout ratio. We can express the dividend in terms of the proportion of earnings over a fiscal ...