A dividend is the distribution of reward from a portion of earnings of company. It is paid to a class of its investors. Dividends are decided and managed by the board of directors of company. They must be approved by the stakeholders through their voting rights. Dividends can be distributed as cash payments, shares of stock, or other property. Cash dividends are the most common. Along with companies, various mutual funds and exchange traded funds (ETF) also pay dividends equally.
Dividend is a token prize paid to the shareholders for their investment in an equity of company, and it usually originates from the net profits of company. While the major ratio of the profits is kept within the company as retained earnings which represent the money to be used for ongoing and future business activities of the company, the remainder can be assigned to the shareholders as a dividend. But, companies may still make dividend payments even when they don’t make suitable profits. They may do so to maintain their recognized track record of making regular dividend costs.
Dividend Paying Companies:
Larger, well-known companies with more expectable profits are often the best dividend payers. These companies tend to give regular dividends as they seek to maximize shareholder wealth in ways apart from normal growth. Companies in the following industry areas are often observed to be maintaining a regular record of dividend payments: usually includes basic materials, oil and gas, banks and financial, healthcare and medicines, and utilities. Companies structured as master limited partnerships (MLP) and real estate investment trusts (REIT) are also top dividend payers since their titles require specified distributions to shareholders. Funds may also issue regular dividend payments as stated in their investment aims.
Important Dates Linked with Dividend:
There are many important dates linked with dividend. These are announcement date, Ex-dividend date, Record date and payment date. These dates follow a chronological order of events. These associated dates are important to determine the stakeholders who succeed for receiving the dividend payment.
Announcement Date: Dividends are announced by the management of the company on the announcement date, and must be accepted by the shareholders before they can be paid.
Ex-dividend Date: The date on which the dividend suitability expires is called the ex-date. For instance, if a stock has an ex-date of Monday, May 7, then stockholders who buy the stock on or after that day will NOT succeed to get the dividend as they are purchasing it on or after the dividend expiry date. Shareholders who own the stock one business day previous to the ex-date that is on Friday, May 2, will receive the dividend definitely.
Record Date: The record date is the expiry date, established by a company, in order to determine which stockholders are suitable to receive a dividend or distribution.
Payment Date: The company issues the payment of the dividend on the payment date, which is when the money gets credited to account of the investor.
Why companies pay dividend:
Companies pay dividend for many reasons. These developments can have different effects and readings. Dividends are expected by the owners as a reward for their trust in a company. The company management aims to honour this feeling by maintaining a strong track record of dividend payments.