What is Dividend? What are Types of Dividend Payment?
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The dividend is a concern of several investors. It is not simply the amount of money a company pays to its shareholders, but it is also an indication of the assessment and valuation of a business. If you are investing in stocks, you need to know what a dividend is, how to receive dividends and other issues related to dividend distribution. Let us find out more in this article below.
What is a dividend?
Dividends are payments that a company distributes its earnings to investors. When the company’s business makes a profit, the major portion of the profits is kept as retained earnings—which are used for the company’s ongoing and future business activities. The remainder is paid out to the shareholders—called dividends. Not all stocks, however, pay dividends.
A dividend is paid per share of stock. The more shares you own, the more dividends you are paid. For example, you own 50 shares of Apple, and Apple pays $0.80 in annual cash dividends, you will receive $40 per year.
Some companies pay dividends to shareholders in cash. Others pay stock dividends, and shareholders receive additional shares issued.
Types of dividend payment
There are several types of dividends a company can choose to pay out to its shareholders. However, two main ways of dividend payment are:
- Cash dividends
- Stock dividends
Cash dividend payment
The cash dividend is a common way for companies to return capital directly into the shareholder’s brokerage account in periodic cash payments.
Cash dividends are often paid regularly, such as monthly or quarterly, but are sometimes one-time-only payouts, such as after a settlement.
Companies that pay cash dividends typically enjoy stable cash flows, and their businesses are commonly beyond the growth stage.
Stock dividend payment
Although cash dividends are the most common, dividends can also be issued as shares of stock.
With this form, the companies pay additional shares to its shareholders instead of cash dividend and keep their profit to reinvest in its business. Hence, this practice is also known as dividend reinvestment.
Important dividend dates to know
There are four important dates you need to keep in mind:
- Announcement Date: The date the company’s management announces its intention to pay dividends. The Board of Directors also announces the dividend value, ex-dividend date and dividend payment date.
- The Ex-dividend Date: You will not be entitled to dividends if you buy shares on this day or after this date. Only owners of shares before the ex-dividend date will receive dividends.
- The Record Date: When the company checks the records to see who is eligible to receive the dividend. The record date is one business day after the ex-dividend date.
- Dividend Date: When dividends are actually paid to company shareholders (applicable to real assets).
The way to receive dividends is quite simple. To receive dividends, you only need to hold shares before the ex-dividend date.
If the shares you hold are listed, dividends will be paid directly to your trading account.
If you hold unlisted shares (OTC), you need to contact and go directly to the business to receive dividends.
What does the dividend tell us?
Dividends show the company’s prospects
A company’s ability to pay steady dividends and its ability to increase dividends represents its positive prospects.
However, it does not mean that companies that do not pay dividends are not unprofitable. If the company thinks its growth opportunities are better than other investment opportunities available to its shareholders, it will keep the profits and reinvest them.
Dividend policy affects share price
Dividend policy is always an issue that attracts the attention of investors, which significantly affects the stock price of a company. Before paying dividends, the issuing company must first announce the dividend amount and dividend payment date to the shareholders. The announcement of dividends – periodic income from investments is also a way of “stimulating demand” to encourage investors to buy and keep their shares. Dividends also represent a company’s business results because it is issued from the company’s profits. The more financially stable the company, the higher the dividend, and the more shares investors hold, the more dividends they receive.
Besides, many people invest in a large number of stocks at certain times only to collect dividends. Some investors buy shares close to the ex-dividend date and then sell them immediately. This is considered a way to receive dividends that can bring attractive returns to professional investors.
In any case, dividends are significant to investors seeking income from their stock investments. A thriving company will try to maintain or raise its dividend to its shareholders from year to year. And when you learn more about dividends and how to receive them, you will understand why dividends are essential information when choosing stocks.