If you own shares of a company's common stock and that company announces that it will pay a dividend to its shareholders, then you will receive the dividend. However, holders of common stock are not necessarily guaranteed a dividend. The company can simply choose not to pay any dividends in a given quarter -- or ever.
If you own a share of stock in a company, you are a bona fide owner of that company. Companies commonly distribute a portion of their profits to their owners in the form of a dividend. Dividends are allocated to stockholders on a per-share basis. If the company has, say, 80 million shares of stock outstanding and declares a dividend of $25 million, then stockholders will get 31.25 cents for each share they own ($25 million divided by 80 million equals $0.3125). Companies sometimes give dividends in the form of new shares of stock -- "stock dividends" rather than cash.
When you hear someone talk about a company's "stock," it's invariably a reference to common stock. The price of common stock is what's quoted when you look up current share prices, and in most cases you could control a company by gaining control of the common stock. Unless otherwise specified, when a company says it will be paying a dividend of, say, "31.25 cents a share," it means 31.25 cents per share of common stock.
Different Classes of Stock
Some companies have more than one class of common stock, usually referred to as Class A and Class B. In such arrangements, Class A is typically (but not always) the "regular" common stock. Class B stock often carries special rights, such as enhanced voting power that allows the company's founders to maintain control of the company. Class B shares also may have special dividend status. Some companies also issue "preferred stock," kind of like a cross between a stock and a bond. Preferred stock typically carries no voting rights, but it comes with a guaranteed dividend. Preferred dividends usually must be paid before common stockholders can receive any dividends.
Who Makes the Decision
Whether holders of common stock receive any dividend at all is up to the company's board of directors. It's the directors who decide whether the company can afford the dividend, and how much it will pay. Some companies pay dividends every quarter, like clockwork. Some pay only when they have money they don't intend to reinvest in the business. Some have never paid dividends.
Video of the Day
- "Financial Accounting for MBAs," 4th edition; Peter Easton et al; 2010
- Securities and Exchange Commission: Ex-Dividend Dates
- AccountingCoach: Cash Dividends on Common Stock