A dividend is a slice of a company’s post-tax profits that is ‘divided up’ among some or all of its shareholders as a reward for investing in them.
The company decides the amount and form of dividends paid, which can be in cash or additional shares.
Why do companies pay dividends?
Dividends allow companies to share their profits with shareholders to reward them for their ongoing support. It can also motivate shareholders to maintain their stocks in the company by generating an income. However, not all companies pay dividends. And they can usually only do so if they make a profit.
How do dividends work?
If a company earns a profit, the board of directors can propose giving out dividends. They may also allow shareholders to vote on this proposal during a General Shareholders Meeting. Dividends can come in different forms. Examples include:
Cash dividends
With cash dividends, you receive money in your account. You can either receive this at the end of the financial year (as a final dividend) or before (as an interim dividend).
Stock dividends
Some companies may offer its shareholders the option of receiving additional company shares instead of cash payments – generally referred to as stock dividends or bonus issues.
They are usually shares offered of the same value as the cash dividend, but instead of receiving cash, those shareholders that select the option, receive shares instead.
What is dividend yield?
The dividend yield shows how much a company pays out in dividends each year relative to its share price. For example, a stock with a dividend payment of $2 and a share price of $20 would have a dividend yield of 10%.
While dividend yield can help you evaluate return on investment, it shouldn’t be the only factor you consider when choosing your investments.
How often are dividends paid out?
This depends on the financial performance and policies of the company. Dividends are usually declared and paid regularly, either quarterly or annually.
Some companies pay dividends more frequently, while others may have irregular payment schedules. However, there are no guarantees, and past dividend payments do not guarantee future payments.
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