Here’s what you need to know about these two popular investment styles.
What is an ordinary dividend?
An ordinary dividend is a regularly scheduled payment made by a company to its shareholders. Dividends are the portion of a company’s earnings not reinvested in the business, but paid out to investors as ordinary dividends, special dividends, or stock dividends. Ordinary dividends are typically paid once a year or once a quarter.
A company uses a portion of its earnings to invest in and expand its business, and pays out the remainder to investors and shareholders. An ordinary dividend may be expressed in cash terms as dividend per share, in which the total amount to be spent on the dividend is divided by the total number of shares outstanding; or as a dividend yield ratio, comprising the dividend per share divided by the price per share.
If a company is publicly traded on a stock exchange and pays out an ordinary dividend, it must declare an ex-dividend date. Anyone who owns stock in the company by the ex-dividend date will receive a dividend payment. The date on which the dividend is actually paid is referred to as he dividend payable date.
The tax rate on dividend income depends on how long a shareholder has owned a dividend-paying stock. If a stock has been owned for less than 60 to 90 days, dividend income is taxed as regular income. Meanwhile, dividends are taxed at the qualified dividend rate if a shareholder has owned common stock for 60 days before the ex-dividend date, or preferred stock for 90 days before the ex-dividend date. The qualified dividend rate ranges from zero to 23.8 percent, depending on a taxpayer’s adjusted gross income.
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Ordinary dividend examples
You decide to invest some of your savings in a business listed on a stock exchange, and you purchase a number of shares in that company through a broker. The value of your investment at any point in time is the current value of the share on the stock exchange multiplied by the number of shares you own. Twice a year, you will receive dividends, which is your share of the distributable profits of the company.