Dividend

DEFINITION of dividend

The dividend is a payment which a corporation pays to its shareholders, usually as a distribution of profits.

WHAT IT IS IN ESSENCE

When a corporation earns a profit or surplus, it is able to reinvest the profit in the business (it is retained earnings). And pay a proportion of the profit as a dividend to shareholders.

Distribution to shareholders may be in cash. Usually, it is a deposit into a bank account. Or, if the corporation has a reinvestment plan, they can pay that by the issue of further shares or share repurchase.

This income represents the portion of profit that a company chooses to return to its shareholders and it is usually expressed as a percentage.

When a company makes the profit, it can choose to reinvest all of its profit back. Or pay some portion (or all) of it give to shareholders in the form of a dividend.

It is one of the ways in which shareholders can hope to earn money from their investment. If a business does not offer a dividend then investors will hope to be compensated with high share growth.

Dividends can be a one-off or regular cash payments.

But can also company may pay them in property or further shares of stock. A share of the after-tax profit of a company is the dividend. The company distributes them to its shareholders according to the number and class of shares held by them.

Smaller companies typically distribute them at the end of an accounting year. Whereas larger, publicly held companies usually distribute it every quarter.

The board of directors decides the amount and timing of paying. They also determine whether it will pay out of current earnings, or the prior earnings are going to keep as a reserve.

HOW TO USE

Holders of preferred stock receive the dividend at a fixed rate and are paid first.

Holders of ordinary shares are entitled to receive any amount of dividend. It is based on the level of profit and the company’s need for cash for expansion or other purposes. Corporate legislation generally forbids payment of dividend out of anticipated but not yet received (unrealized) profit. In other words, even if the company expects good results, it can not pay dividends if profit isn’t realized.  The anticipation of good results isn’t criterion on which they can make the decision about paying dividends.

Normally all dividend payments are taxable, often at the source