What is a Dividend?

Dividend Overview

A dividend is the distribution of a company's earnings to its shareholders and is determined by the company's Board of Directors. Dividends are typically distributed quarterly and paid out as cash or in the form of reinvestment in additional stock.

Stock Dividend Details

A dividend is a reward paid to the shareholders for their investment in a company’s stock, and it usually originates from the company's net profits, although companies may still make dividend payments even when they don’t make suitable profits in order to maintain their established track record of dividend distributions. Alternatively, a company’s profits can be kept within the company as Retained Earnings to be used for the company’s ongoing and future business activities.

Why Do Companies Pay Dividends?
Dividends are often expected by the shareholders as a reward for their investment in a company. Dividend payments reflect positively on a company and help maintain investors’ trust.

A high-value dividend declaration can indicate that the company is doing well and has generated good profits. But it can also indicate that the company does not have suitable projects to generate better returns in the future. Therefore, it is utilizing its cash to pay shareholders instead of reinvesting it into growth.

A company with a long history of dividend payments that declares a reduction of the dividend amount, or its elimination, may signal to investors that the company is in trouble.

However, a reduction in dividend amounts or a decision against a dividend payment may not necessarily translate into bad news for a company. The company's management may have a plan for investing the money such as a high-return project that has the potential to magnify returns for shareholders in the long run.


What Type of Company Pays Dividends
Larger, established companies with predictable profits are often the best dividend payers and the following industry sectors maintain a regular record of dividend payments: 

  • Basic materials

  • Oil and gas

  • Banks and financial

  • Healthcare and pharmaceuticals

  • Utilities


Important Dividend Dates and Definitions
Dividend payments follow a chronological order of events, and the associated dates are important to determining which shareholders qualify to receive the dividend payment.

  • Announcement date: Dividends are announced by company management on the announcement date (or declaration date) and must be approved by the shareholders before they can be paid.

  • Ex-dividend date: The date on which the dividend eligibility expires is called the ex-dividend date or simply the ex-date. For instance, if a stock has an ex-date of Monday, May 5, then shareholders who buy the stock on or after that day will NOT qualify to receive the dividend. Shareholders who own the stock one business day before the ex-date, on Friday, May 2, or earlier, qualify for the distribution.

  • Record date: The record date is the cutoff date, established by the company to determine which shareholders are eligible to receive a dividend or distribution.

  • Payment date: The company issues the payment of the dividend on the payment date, which is when the money gets credited to investors' accounts.

Example of a Stock Dividend

If XYZ company's board of directors decides to issue an annual 5% dividend per share, and the company’s shares are worth $100, the dividend is $5. If the dividends are issued every quarter, each distribution is $1.25. So, if you own #100 shares of XYZ company you will receive $125 per quarter or $500 per year.

Conclusion on Stock Dividends

Though dividends can signal that a company has stable cash flow and is generating profits, they can also provide investors with recurring revenue. Dividend payouts may also help provide insight into a company’s intrinsic value. Many countries also offer preferential tax treatment to dividends, where they are treated as tax-free income.


Happy Trading, Verdia

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