What is a dividend?
A Dividend is a payment made by a company. This payment is directed to a selected group of shareholders of a company. Usually, every shareholder is eligible if they own a stock or a part of it before the ex-dividend date. A dividend often comes from the company’s net profit unless they are fund dividends. Normally, a dividend is paid out as cash, but it can also be paid in additional shares of stock, which are not taxed.
How do stock dividends work?
Dividends are paid per share of stock and are scheduled monthly, quarterly, or annually depending on the company. For example, Microsoft pays a quarterly dividend of $0.56 per share according to Microsoft News Center.
What companies don’t pay dividends?
Start-up companies rarely pay dividends because these companies use their profits for research, expansion, product development, and acquisitions. All these costs a lot of money thereby companies in the early stages can’t afford to pay dividends.
Many biotech and tech companies are considered high-growth companies. These types of companies rather reinvest their profits in new products, new ideas, and better services, instead of using the cash to pay dividends. Remember, high-growth companies have the capacity to keep growing regardless of how big they already are. When a company keeps growing their stock value increases, giving shareholders in return something more valuable than dividends. Without mentioning that by doing so companies avoid taxes. Everybody wins!!
What companies pay dividends?
Generally large, established companies without high-growth potential are more likely to pay dividends. Contrary to high-growth companies, these companies are valuable to investors for their dividends, not their stock value. The stock value for these companies tends to go up and down, but never they show consistent growth. Company sectors that maintain a regular record of dividend payments:
- Basic materials
- Oil and gas
- Banks and financial
- Health care and pharmaceuticals
Reasons why a company pays dividends
- Dividends are often seen as rewards for shareholders for putting their trust in a certain company.
- High-value dividends often indicate a company is doing good. This increases the demand for the stock, increasing its value.
- The company has no future plans or projects and rather use the money to pay shareholders instead of reinvesting it.
- The company has no real growth potential.
Types of dividend
Cash dividends: Cash dividends is a cash payment made by a company to its shareholders. For example, if an investor owns 100 shares and a company pays 50 cents per share then the company pays $50 in cash to the investor.
Stock dividends: Stock dividends are similar to cash dividends, the only thing that changes is that the payment is made in shares.
Dividend reinvestment programs (DRIPs): Dividend reinvestment programs allow investors to automatically reinvest their cash dividends into additional shares.
Special dividends: A special dividend is a non-recurring distribution of company assets, usually in the form of cash, to shareholders according to James Chen.
Preferred dividends: Preferred dividends are a special type of dividend only meant for a couple of priority stockholders.
Dividend date terms
Ex-Dividend Date: The Ex-dividend date is normally set one business day before the record date. If an investor decides to buy a stock on its ex-dividend date or after, the investor won’t be eligible to receive the upcoming dividend payment, instead the seller is receiving it.
Announcement date: Announcement date or also referred to as the “declaration date” is a set date on which the next dividend payment will be executed, this is announced by the board of directors of a company. This report includes the dividend‘s size, ex-dividend date, and payment date.
Record date: The record date is a cut-off date set by the board of directors of a company. This date is used to select which shareholders are eligible to receive the payment of the upcoming dividend.
Payment date: The payment date is designated by a company’s board of directors. Dividends are paid on this date. If an investor is the holder of a company's shares at the close of trading on the day before the ex-dividend date, he will then be able to receive the payment.