Final answer:
Shareholders who are registered as owners of a company's stock on the date of record are chosen to receive dividends. The dividend amount is related to the number of shares owned.
Step-by-step explanation:
Shareholders are chosen to receive dividends based on their status as stock owners on a specific date known as the date of record. When a company decides to issue a dividend, it declares a date of record, and only the shareholders listed on the company's books on that date are entitled to receive the dividend. It's important for investors to know this date because buying a stock before the date of record ensures they are on the shareholder list to receive the upcoming dividend.
Dividends are a portion of the company's profits distributed to shareholders as a return on their investment. The amount received is proportional to the number of shares owned. For example, if a dividend is $0.75 per share, a shareholder owning 85 shares would receive a total dividend payment of $63.75.
Companies that are stable, such as Coca-Cola and various electric companies, often provide dividends because they can predictably generate profits over time. Shareholders typically hold onto these stocks for several years to reap the benefits of these regular payments along with the potential for capital gains, which is the increase in stock value from the time of purchase to the time of sale.
Understanding when and how to receive dividends and what factors influence the rate of return are essential questions for anyone involved in large company stock ownership. Dividends and capital gains are both forms of returns that investors expect when they purchase stock. For instance, buying at $45 and selling at $60 would yield a capital gain of $15 per share.