13 Jul
The dividend is a part of the company’s financial plan/statement that is usually announced at the annual and quarter year. The main goal of a company paying a dividend is to ensure shareholders’ income to thank them for supporting the business and to encourage investment in its stock by increasing the value of assets on hand owned.
This article gives you a detailed insight into the dividend, types, and how it works.
Dividend meaning
The term “dividend” comes from the Latin word dividere, which means “to divide.” The dividend is a part of the profit and earnings of a company that is distributed to the shareholders. It is a company’s choice to return earnings and profit to the investors as a dividend or retain this profit for internal development projects, reinvest in the business, or buy stock in the company. A payment is made when the company has excess profits, and the board of directors decides to distribute those profits to shareholders.
Shareholders can get dividends in two ways:
- When the company pays them (called “dividend yield”).
- When they decide to pay them (called “dividend growth”)
Importance
The dividend is important because it increases shareholders’ loyalty and makes their stock more attractive to investors. It also helps in providing the company with intrinsic value.
Dividends can also provide investors with recurring revenue. There are certain reasons why dividends matter to investors:
- It increases stock investing profit
- Reduces overall portfolio risks
- Build trust of shareholders in the company
- Help to preserve the purchasing power of capital
- Dividends offer tax advantages
Dividend types
There are various types of dividends a company pay to its shareholders. Below are the common types of dividends.
Cash
A common dividend payment is paid through checks or cash to the shareholders.
Stock
A type of dividend is paid out to the shareholders by issuing new shares in the company.
Assets
This type of company pays out dividends in the form of assets such as investment securities, physical assets, and real estate.
Scrip type
A company may issue a scrip dividend when the company has insufficient funds to pay dividends in the near future. A scrip dividend is a promissory note to pay a dividend at a future date.
Special
The special dividend is a non-recurring dividend paid to the company’s shareholders due to specific events like the sale of fixed assets. The special dividend is usually paid in the form of It is usually the result of having excess cash in hand for one reason or another.
Common
A common dividend refers to the dividend paid to the company’s common shareholders.
Preferred
It refers to the dividend paid to the preferred shareholders of the company. A preferred dividend is paid before the common dividend is declared.
Dividend date
The several important dates associated with the dividend.
Announcement date
The date on which the company board of directors sets the dividend payment date. BOD sends a letter to the shareholders with the dividend information.
Ex-dividend date
The date on which the dividend eligibility is expired is called ex-dividend or ex-date. The shareholder must own the shares on the ex-dividend date. After the ex-date, the shareholders will not be eligible to receive that particular dividend.
Record date
The date established by the company to determine which shareholder is eligible to receive a dividend.
Payment date
The date on which the company pays dividends to the investors.
How does a dividend work?
The following are the steps of dividends.
- The company creates profit and earnings.
- The management team/board of directors decides to pay out a portion of profit to the shareholders/investors instead of being reinvested in the business,
- The board of directors approves the planned dividend.
- The company executes a plan of the value per share, the date when it will pay, the record date, etc.
- Lastly, the dividend is paid to the shareholders.
How Do Dividends Affect a Stock's Share Price?
Dividends are a great way for a company to reward its shareholders. They allow shareholders to get paid for their company shares, and they can help the company continue to grow and build value for its shareholders.
Many factors affect how a stock’s share price reacts to a dividend announcement.
- The amount of the dividend
- Whether it is paid out in cash or as stock
- Whether it is paid quarterly or annually
Conclusion
To summarize the above article, dividends are formed when a company decides to pay some of its profits back to its shareholders. Whether or not a company decides to pay out dividends will be an important decision for the management of that company because it has to decide whether it’s worth paying out some of its profits every year to make sure that shareholders get a higher rate of return than they would from investing elsewhere.
Shabana has been a committed content writer and strategist for over a 5 years. With a focus on SaaS products, she excels in crafting compelling and informative content.
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