You have heard about the stock markets, share, and bonds in the news. A dividend is money you get for buying those shares and bonds, distributed by the company against the number of shares you hold. Dividends are a fraction of the profit and retain the earnings of a company.
What is a Dividend?
Through incorporation, a company is created. During incorporation, a company can opt for issuing shares or not. Depending on that, the company will be either a public company or a private company. Unlike private companies, public companies can issue shares in the stock market. Shares are tiny pieces of the ownership of the company.
The directors of the company hold the majority of the stock and release a meager amount of shares to the public. People buy these shares, and with that money, the company invests in future projects. That allows them to take on bigger and riskier projects.
Since the money is being sourced from the public, the company takes on more significant projects with that money. After that, when the company generates profit, it rewards the shareholders with money against their share. This monetary reward is called a dividend.
Sometimes it’s money that you get as a reward, and sometimes you get more shares as a reward. If the company comes short and does not make any profit, the company cant is held accountable for not being able to distribute dividends. Instead, their loss will carry on to the upcoming years.
There are two types of shares available in the share market, the common stock, and the preferred stock. Setting aside the differences between common and preferred stock, both the class will receive payments according to the type to share they bought.
How Does the Company Distribute Dividends?
When it comes to distributing dividends, the business must generate profit. Sometimes, the company will add money from the retained earnings with the profit for the dividend.
After making profits, the managerial executives of the business decides how much to pay in dividend for that year. The directors give a small portion to the shareholders without investing that money back. The small part includes the excess from the profits.
The next step after coming with the number of dividends is to get it approved by the board. When the board approves, the company announces that they will be paying dividends. After that, the dividends are then sent out to the shareholders.
Kinds of Dividends
There are many kinds of dividends. Among the various type of dividends, the most basic one is the cash dividend. The payment can be wired or paid in liquid cash. The second kind of dividends is the stock dividends; For that, the company hands out shares instead of hard cash.
Another type of dividend paid is an asset dividend. During this time, the company hands out physical assets, investment securities, and more. Right after that is the particular kind of dividends. Special dividends refer to the payment of dividends that are done outside the usual date of payment. Companies usually do this when they have more than an adequate amount of cash on their hand.
There are other kinds of payment for dividends as well. In such cases, the company gives its shareholders financial assets and more.
Earlier discussed, the dividend distribution system has three essential dates. These dates are the declaration date, the date of record, and the date of payment, The decision of paying the shareholder, has to pass the board. When it is confirmed that the company wants to pay dividends to the shareholders, the company reaches out to its shareholders and announces a date. This date is called the declaration date.
The second most important date is the record date. The record date also goes by the name “Ex-Dividend Date.” On this day, the company makes a record of its shareholders and distributes the dividends according to those dates.
Lastly, there is the payment date as the name suggests, on this day, that shareholders will be paid. The majority of the time, the company will reward the shareholders four times a year or quarterly. However, some companies pay only once, and that is usually at the end of the business’s fiscal year.
Stock dividends are shares that are rewarded to the shareholders replacing the cash. This gives the shareholder additional shares over the ones they already owned. This kind of dividends is usually paid to the common stockholders of the company.
Also, there are reasons as to why the company may want to pay the shareholders through the additional shares. One of those reasons will be not having sufficient cash in one hand. Another reason behind the stock payment is to lower the price of one share. This helps to reduce the price of the stock to a desirable amount, which increases the liquidity.
Impacts of Dividend
Share prices react to dividend payments. Once paid, dividends cant be called back. That’s why once the dividend is paid, the businesses record this transaction in their books accordingly.
The share prices may rise or fall according to the dividends declared. The share price sees an increase when a large number of dividends are announced, and witnesses fall when the ex-date starts.
Why Pay Dividends?
A company is not obligated to pay its shareholders. Then why does the company pay its shareholders dividends? There are many reasoning behind that. However, the thinking of the company is open to interpretation by the investors.
Dividend payments are historical records of the company’s profit and how well it performs. Companies send out dividends to honors the shareholders’ trust in their company. If the company pays dividends regularly, then this action implies that the company is doing well and attracts more investors.
However, too much is never good. Just as the saying goes, if a company has a record of paying high dividends every year, then it means that the company has no project to generate higher returns from.
In conclusion, dividends are rewards for shareholders. The company must give out the right amount of dividend payment to increase its goodwill while investing in other portions of profit in projects.