Dividend

International dividend frequencies

Dividend refers to a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business (known as retained earnings). The decision to distribute dividends is made by the corporation's board of directors and it is important to note that dividends are not a liability of the corporation until they are declared by the board.

Types of Dividends

Dividends can be issued in various forms, such as cash payment, shares of stock, or any other form. The most common dividend type is the cash dividend. Other types include:

• Stock Dividend: A payment made in the form of additional shares, rather than cash.
• Property Dividend: A payment made in the form of assets from the issuing corporation or another corporation.
• Scrip Dividend: A promise to pay shareholders at a later date.
• Liquidating Dividend: A type of dividend paid during the liquidation of a company.

Dividend Policy

The dividend policy of a company is the strategy a company uses to decide how much it will pay out to shareholders in dividends. The three main dividend policies are:

• Stable Dividend Policy: The company aims to pay a steady and predictable dividend amount.
• Constant Payout Ratio: The company pays a fixed percentage of its earnings as dividends.
• Residual Dividend Policy: Dividends are paid out from the residual or leftover equity only after all project capital requirements are met.

Factors Influencing Dividend Policy

Several factors influence a company's dividend policy, including:

• Earnings: Profitability plays a key role in determining whether dividends can be paid.
• Cash Flow: The availability of cash affects a company's ability to pay dividends.
• Growth Opportunities: Companies with high growth opportunities might retain earnings to finance growth instead of paying dividends.
• Tax Considerations: Tax policies can influence the preference for dividends or capital gains.

Dividend Dates

There are several important dates to consider regarding dividends:

• Declaration Date: The date on which the board of directors announces the dividend.
• Ex-Dividend Date: The date on which the stock starts trading without the dividend included in its price.
• Record Date: The date by which you must be on the company's books as a shareholder to receive the dividend.
• Payment Date: The date on which the dividend will be paid to the shareholders.

Impact on Share Price

The announcement of a dividend typically has a positive effect on share price, as it signals the company's confidence in its financial health. However, the share price may drop on or after the ex-dividend date by an amount roughly equal to the dividend paid.

Dividend Reinvestment Plans (DRIPs)

Some companies offer dividend reinvestment plans, which allow shareholders to automatically reinvest their cash dividends in additional shares of the company's stock, often without commission.

Conclusion

Dividends are an important aspect of investing in stocks, providing an income stream to shareholders and signaling the financial health of a company. Understanding the types, policies, and dates related to dividends can help investors make informed decisions.