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Corporations return capital back to investors through both cash dividends and stock buybacks. Ongoing capital return programs signal that the corporation is a mature business with healthy cash flow. It is critical that prospective investors learn to account for dividends to identify opportunities, calculate returns, and pay income taxes.

Dividend Payment Schedule

Take note of the ex-dividend, record, and payable dates. You must be a shareholder of record on the record date, to be eligible to receive dividends on the payable date.

To be a shareholder of record, you must buy and hold shares of stock prior to and through the ex-dividend date, which typically falls two days before the record date and one month prior to the payable date. Corporate investor relations departments will post these dates; and dividends are generally paid out quarterly.

A corporation will account for its dividend payouts within its statement of cash flows financing activities section.

Dividend Calculations

Dividends are quoted in per share amounts. Dividend yield calculations, like interest rates, are estimates for future levels of investment income upon a set amount of principal. A $100 stock that pays out $2 in annual dividends offers a 2% dividend yield.

Dividend yields do highlight the risk versus reward tradeoffs between investing for income and investing for growth. Again, mature businesses such as Coca-Cola, McDonald’s, and Exxon will typically show 2-3% payouts.

Google, however, has never paid out any dividends, so that all cash flow may be reinvested for growth.

Double Taxation

Dividends are subject to double taxation and are taxed at both the corporate and shareholder level. First, corporations pay dividends out of after-tax profits.

The U.S. corporate income tax rate is now 21 percent, for 2023. Additionally, state corporate tax levies range from a low of 2.5% in North Carolina to a top rate of 11.5% in New Jersey.

Shareholders then receive these same cash dividends as taxable income to hand over even more cash to the Federal Government. U.S. corporations do get a bit of relief, in being able to write off 50-65% of dividend income received from other domestic corporations.

Dividend income will be classified as either ordinary or qualified on your 1099-DIV tax forms. For 2023-2024, ordinary dividends are taxed as ordinary income at 10, 12, 22, 24, 32, 35, and 37-percent ordinary income rates.

For long-term savers, qualified dividends will be tax free for single filers reporting $41,675 or less ($83,350 for married filing jointly) in taxable income. Single filers earning between $41,675 and $459,750 ($83,350 and $517,200 for married filing jointly) in taxable income will pay 15% taxes on qualified dividends.

Qualified dividends may be taxed at 20% at most.

Dividends paid out on shares of stock held for more than 60 days out of the 120-day time frame surrounding the ex-dividend date qualify for special tax treatment.

Financial Risks

Bondholder asset claims are senior to those of shareholders. Unlike interest payments on bonds, corporations are not legally obligated to pay dividends.

An abnormally high dividend yield may foreshadow corporate bankruptcy. At that point, the share price denominator would have already collapsed before the dividend is eliminated altogether.