A dividend is a corporate payment of assets or earnings to shareholders. This payment can be made in two forms: cash or stock. Both distributions have similarities and are issued in the way.
Dividends represent a portion of a company's earnings returned to investors, typically as a cash payment. A company can choose to distribute earnings as dividends or retain the cash for internal development or acquisitions. Mature companies, not requiring cash for additional growth, are more likely to issue dividends. Conversely, rapidly-growing companies, needing cash to fund operations, are less likely to issue dividends and may even resort to debt.
Dividends may be obligatory under a preferred stock agreement specifying regular dividend payments. However, companies are not obligated to issue dividends to common stock holders.
Companies offering dividends typically do so consistently, attracting long-term investors seeking stable income. However, this may discourage growth-oriented investors who prefer companies reinvest all cash to boost earnings and stock prices.
Some publicly held companies provide dividend reinvestment plans, allowing investors to reinvest dividends in additional shares at a discount, maximizing cash reserves while encouraging stock retention.
Dividends may also be paid in other assets or additional stock. After a dividend is paid, the company's value decreases, impacting stock prices, unless the dividend proportion of total assets is small.
Several key dates are associated with dividends:
The declaration date is when a company's board of directors approves the amount and payment date of a dividend, being the only authority to approve dividends.
The record date is when the company compiles the list of investors eligible for a dividend; only stockholders on this date receive payment.
The payment date is when the company disburses dividends to its investors.
The dividend payout ratio is the percentage of a company's earnings distributed to shareholders as dividends. The dividend yield ratio compares dividends paid to investors with the market price of the stock, crucial ratios closely monitored by investors.
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