Personal Finance Terms / Dividend
What Is A Dividend?
A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property. They are a way for companies to distribute revenue back to investors, and they can come in various forms, including cash or additional shares of stock. Learn more about dividends from resources like Forbes and the Corporate Finance Institute.
More About Dividends
Dividends are typically paid on a regular basis, but some companies may offer special or one-time dividends depending on their financial circumstances. The frequency of dividend distributions varies from company to company, with some offering monthly, quarterly, or annual dividends. Some companies, especially newer or growth-oriented firms, may not offer dividends at all, instead opting to reinvest all earnings back into the company. The payment of dividends can be a sign of a company's financial health and stability, and it can also provide a steady income for investors, particularly those in retirement.
Types Of Dividends
- Cash Dividends: These are the most common type of dividends, paid out in cash directly to the shareholders on a per-share basis.
- Stock Dividends: Instead of cash, companies may issue additional shares of stock to shareholders.
- Special Dividends: These are one-time dividend payments, often issued during particularly profitable periods or upon achieving a significant milestone.
Dividend Distribution Process
Dividends go through a several-step process before they are distributed to shareholders:
- Declaration Date: The date on which the company’s board of directors announces a dividend will be paid.
- Ex-dividend Date: Shareholders need to own the stock on or before this date to receive the dividend.
- Payment Date: The date on which the dividend is distributed to the shareholders.
Frequently Asked Questions
Companies decide to pay dividends to investors out of their excess earnings as a way to reward them, and generally speaking, firms that can pay dividends are in a financially stable position.
No, dividend payouts are not mandatory for companies. Some growth companies may decide to not pay dividends and use the excess funds to grow the business.
A franked dividend is a dividend with a tax credit, whereas an unfranked dividend means the company has not paid tax, and the stock owner must pay tax on this.
You need to purchase the stock one day or more before the ex-dividend date to receive the dividend.
Instead of receiving the dividend payment in cash, shareholders can opt to have some or all of this paid in new shares, increasing the shareholding over time as more dividends are reinvested in shares.
The dividend yield represents the percentage of the company’s dividend compared to its share price, with a higher dividend yield potentially signifying higher income from that stock.