Key Takeaways
- Distribution of a company’s earnings to its shareholders as determined by the company’s board of directors is called a ‘dividend’.
- It can be paid monthly, quarterly or annually i.e. at a scheduled frequency.
- Dividend dates follow a chronological order and are important to determine shareholders who qualify for receiving the payments.
- Dividend yield is a financial ratio that helps the investor understand what to expect in future income from the stock based on the price they buy today.
What Are Dividends?
Distribution of a company’s earnings to its shareholders as determined by the company’s board of directors is called a ‘dividend’. A dividend may be in the form of cash or in the form of stock.
Understanding Dividends
Shareholders must approve their dividends via their voting rights. Cash dividends are the most common forms of dividends, however, some companies issue stocks or shares of other property as dividends as well.
A major portion of the company’s profits are saved as retained earnings – something to be reinvested into the company for future business activities. The remainder is distributed to shareholders as dividends and can be considered as a token of appreciation for the shareholders for investing in the company. Sometimes, companies keep up with their dividend payment despite having unsuitable profits. They do this to maintain their reputation as a dividend paying company.
Dividends can be paid monthly, quarterly or annually i.e. at a scheduled frequency. The company’s board of directors decide the time frames and payout rates depending on the company’s profitability. Companies with predictable profits are often considered to be best dividend payers. By issuing regular dividends, they maximize shareholder value and wealth.
Dividend Dates
Dividend dates follow a chronological order and are important to determine shareholders who qualify for receiving the payments.
- Announcement Dates: These are dates where dividends are announced and are approved by the shareholders before they are paid.
- Ex-Dividend Dates: On this date, the eligibility of the dividend expires. Shareholders who buy stocks after this date are not eligible for dividend payouts.
- Record Date: This is a cut off date determined by the company to evaluate which shareholder is eligible for dividend payout or distribution.
- Payment Date: On this date, shareholder accounts are credited with money the company has issued as dividend payment.
Dividend Yields
A dividend yield is a financial ratio that compares cash dividends paid to shareholders relative to the market value of a share. A company with high dividend yield pays a great share of its profits in the form of dividends to their shareholders. This helps the investor understand what to expect in future income from the stock, based on the price at which they buy today.
A dividend yield is always compared with the industry average for a comprehensive analysis of the company’s returns to its investors.
Calculating Dividend Yields
Dividend yields are usually expressed as a percentage:
Dividend Yield = (Cash Dividend per Share/Market Price per Share) x 100
High Dividend yields are a good investment option and are suitable for investors who are risk averse. However it is important to beware of companies with unusually high dividend yield because by doing so, they do not save their profits as retained earnings and potentially knock off the opportunity for investment in their own business to ensure its growth.
