Dividend is a reward, cash or otherwise, which a company gives to its shareholders. Dividends can be issued in different forms, like cash payment, stocks, or any other form. A company’s dividend is determined by its board of directors and needs the shareholder’s approval. Note, however, that it is not mandatory for a company to pay, rather dividend is usually a part of the profit that the company shares with its shareholders.
How Do Dividends Work?
Typically, dividend payments take one of two forms:
- Cash paid to you (which is more common)
- Additional stocks issued to you (which is less common, but you can sell and convert to cash)
Companies on their own side may also offer dividend reinvestment programs (DRIPs). Now, these programs enable you to reinvest some (or all) of the dividend back into additional shares of the company at a discounted rate.
Understand, that not all stocks pay dividends. Thus to get paid dividends, you would have to choose one of the following:
- Dividend-paying stocks
- Dividend mutual funds (a collection of dividend stocks)
- Exchange-traded funds (ETFs) which pay dividends.
The dividends are Paid by Who?
The dividend amount is determined by the company board of directors, and the board of directors also manages these payments. The amount of the dividend, is usually a portion of company earnings, and the company can decide not to pay dividends, and instead reinvest the money back into the company. Now this action is one that must be approved by the board.
Most cash dividends in the United States, are paid on a quarterly basis, while stock dividends, on the other hand, are generally paid at infrequent intervals.
Types of Dividends
There are different types of dividends a company can pay to its shareholders. Here are a list and a brief description of the most popular types that shareholders receive.
This is the payment of actual cash from the company straight to the shareholders and happens to be the most common type of payment. Here, the payment is usually made electronically via wire transfer, but may also be paid by check or cash.
Stock dividends are those paid out to shareholders by issuing new shares in the company. These dividends are paid out pro-rata, depending on the number of shares the investor already owns.
A company may also pay out other assets like investment securities, physical assets, and real estate as dividends, even though this is not a common practice.
A special dividend is one that is paid outside of a company’s regular policy (i.e.) either quarterly or annually etc.). This is usually as a result of having excess cash on hand for one reason or another.
The class of shareholders here are common shareholders, not what is actually being received as payment.
Preferred refers to the class of shareholders receiving the payment.
Other, less common, types of financial assets can also be paid out as dividends, like options, warrants, shares in a new spin-out company, and more.
Important Dates for Dividends
Before you go ahead to invest, it is essential that you know when a company pays dividends and be familiar with the following terms:
Dividend Declaration Date
This is when a company’s board of directors declares that a dividend will be paid. This is dependent on the company’s financial performance, the board then determines the amount of the dividend, and declares dividend payments to shareholders on record. It is also the board of directors, who announces the dividend record date.
Dividend Record Date
The dividend record day refers to when a company reviews its books in order to determine its ‘shareholders on record’. Shareholders who hold a particular stock on this date gets the firm’s dividend payment.
After the record date has been determined, the stock exchanges or the National Association of Securities Dealers (NASD) will assign the ex-dividends date, which is exactly one trading day before the record date.
Now this date is very important to shareholders because it determines if you are paid or not. If an investor happens to buy a stock before the ex-dividends date, then they will get the dividends payment. If they happen to purchase the stock on or after the ex-dividends date, then they will not receive the dividend.
What is the Importance of Dividends?
Dividends are important for various reasons:
Dividends provide a source of income that. Many investors rely on, especially if you are retired and hold a portion of. Your investment portfolio in stocks.
Dividends impact share price, because they take. Money out of the company, which in turn has an impact on the company share price. This typically takes place on the ex-dividend date because share price drops because of shareholders now owing to the stock from this date forward.
Another good side of dividend is that it can build a company’s reputation. This is because a stable dividends payout is a sign of business maturity and confidence in cash flow. Immediately a dividend is established, investors expect that dividend to remain, even in a financial downturn. If the company happens to pull the dividends, the number of investors will go down along with the company’s reputation.