Paying stock dividends

October 6, 2005 8:14 AM

when a company says that they will pay a one time dividend of $1.00 for each outstanding share of common stock, does that mean that they are going to pay me $1 for each share of stock that I own? Or what does it mean?
posted by sandra194 to work & money (8 comments total)

That's what they mean. It goes into your brokerage account as cash unless you have dividend reinvestment enabled.
posted by letterneversent at 8:17 AM on October 6, 2005

Yup. The extra good news is that income from dividends is taxed differently than regular income, so you'll get to keep more of that $1 than if you had earned it working.
posted by GuyZero at 8:25 AM on October 6, 2005

"outstanding share" means a share that is owned by someone. Normally, a company has more authorized shares than outstanding (issued) shares. So, for example, Company X may have 10 million shares authorized, but only 8.5 million shares issued.

The unissued 1.5 million shares are available to the company (for example) to use to acquire another company, issue stock options against, give to upper management as part of their compensation, or even sell on the open market to raise cash.

Because of such things like options, warrants, and convertible stock (a company may have none or all of these), the company will issue a dividend "as of" a certain date, typically not knowing exactly how many shares will be outstanding at that time (but, of course, having a pretty good idea - certainly within 1 percent).
posted by WestCoaster at 10:12 AM on October 6, 2005

The bad news is that the stock price often drops by $1 to compensate.
posted by smackfu at 10:16 AM on October 6, 2005

Generally true, but blue chip stocks tend to hold well after dividends are given.
posted by mystyk at 11:10 AM on October 6, 2005

That mysterious hand of the market should have factored in to the price the chance that a company will be distributing some of its profits to the stockholders. The price reflects the value of the company's assets AND its future earnings. So the price doesn't usually drop, unless the company were to declare a huge and unusual dividend.

Since the market does not always take this dividend fully into account, companies that pay relatively high dividends ("high yield") tend to have a better overall return than companies that don't.

This is in contrast to a mutual fund, where the share price does not reflect the market's valuation of the company. Instead, the share price is a reflection of the net asset value (ie if the assets of the fund are worth $50 billion, and there are 1 billion shares outstanding, each share is worth $50). If that mutual fund then pays out a $1 dividend to each outstanding share has paid out $1 billion in cash, is now worth $49 billion, and your share is now worth $49 (but you've got the extra dollar in cash).
posted by teaperson at 11:25 AM on October 6, 2005

Actually, stock prices usually go up in anticipation of a dividend (or known regular quarterly dividend) then down after the distribution.

I don't know, but would expect (my distributions have all been from regular payers), an announced 1-time dividend would result in a price increase to cover the dividend, followed by a decrease after the distribution date.
posted by Goofyy at 9:44 PM on October 6, 2005

A real life example of the stock price reflecting a one time dividend: MSFT
posted by smackfu at 7:08 AM on October 7, 2005