You might invest in the stock of a company that you think is well managed, thriving, in a hot economic category and poised for growth. That growth might drive the stock's market price up, which would increase the value of your investment. The company's board of directors might also choose to pay out some of its profits in the form of a dividend, but the amount of the dividend has nothing to do with changes in the stock's market price.
Dividends are distributions of property by a company to its shareholders. Those distributions come from the company's earnings and profits. In most cases, dividends are paid out in cash, but they don't have to be. A company can pay dividends in the form of additional company stock or in other types of property. Unlike interest payments on company debt instruments, such as bonds, dividend payments are not guaranteed. They only happen when the company's board of directors votes to pay them.
A stock's market price is not determined by the company's board of directors. The stock's price may fluctuate up or down, sometime significantly during the course of a single day, based on market factors such as earnings, economic news or supply and demand. Dividends are typically declared as a fixed amount without regard to the stock's current market price. For example, the board might declare a quarterly dividend of $1 per share on June 21, to be paid on Aug. 10. The amount of the dividend will remain $1 regardless of any change in the stock's market price between the time the dividend was declared and the time it was paid.
Dividends are paid to the stockholder of record before the stock's ex-dividend -- or reinvestment -- date. If you buy a stock on or after the ex-dividend date, you are not entitled to receive that declared dividend. The market price of the stock typically drops by the amount of the dividend once it reaches its ex-dividend date as the market compensates for the dividend payout, but the amount of the dividend does not change.
Preferred stock is a hybrid type of investment that has qualities of both common stocks and bonds. Instead of a declared dividend each quarter, preferred stock is typically issued with a fixed stated dividend. Preferred stock dividends are not guaranteed, but in most cases they must be paid before any common stock dividends are paid. Since preferred dividends are fixed, much like bond interest payments, preferred stock prices tend to move in response to changes in prevailing interest rates.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.