If a company has excess earnings from which it decides to pay a dividend to common stock shareholders, the amount is declared along with a payable date. Usually, this is determined quarterly after a company finalizes its income statement. The board of directors meets to review the financial statements and declares a dividend at that time or decides to retain the earnings to reinvest back into the company.
If a dividend is declared, shareholders are notified via press release, which is usually copied into major stock quoting services for easy reference. The record date is set, meaning all shareholders on record on that date are entitled to the dividend payment. The day following the record date is called the ex-date or date the stock begins trading ex-dividend. This means that a
buyer on ex-date is purchasing shares that are not entitled to receive the most recent dividend payment. The payable date follows usually about one month after the record date. On the payable date, the company deposits the funds for disbursement to shareholders with the Depository Trust Company, or DTC. Cash payments are then disbursed by the DTC to brokerage firms around the world where shareholders hold their shares. The recipient firms appropriately apply cash dividends to client accounts or process reinvestment transactions per a client's instructions.
Tax implications for the dividend payments vary depending on the type of dividend declared, account type where the shareholder owns the shares and how long the shareholder has owned the shares. Dividend payments are summarized for each tax year on Form 1099-DIV for tax purposes.