Dividend
Dividends Meaning
Dividends refer to the portion of a company’s profits that is paid to shareholders as gratitude for investing in the equity of the company. They are issued in cash or as additional shares with the board of directors of a company making such decisions.
Not all securities offer them because it is an expense for a business and reduces its retained earnings. The reinvestment
of retained earnings is essential to the growth of the business. Investors prefer dividend-paying stocks because they offer relatively stable income beyond the profits that can be made from trading in stocks.
Remember
Dividends are rewards paid to shareholders of a company that generally generate financial gains. Preferred shareholders who do not have voting rights generally have a higher priority to receive them than common shareholders who have voting rights.
The yield is determined by dividing the annual dividend of each share by the price per share.
Dividends reflect the earning capacity of a business as a source of income. They are usually paid out of a company’s profits or accumulated profits to keep
shareholders invested in the stock. However, being an
expense, this reduces retained earnings that not all businesses can afford. Also, in case of loss, companies cannot issue them.
Since the law does not oblige companies to pay dividends, many of them prefer to reinvest their profits to alleviate shortages or to direct funds towards business growth projects. Large-cap stocks and established
listed companies tend to issue more because they are in better financial condition. For example, ATandT has over 30 years of dividend distribution history, with a 2021 yield of 7.43% at $ 2.08 per share.
Therefore, these securities attract investors because they offer relatively stable income beyond the income that can be derived from their sales. Some companies even pay a one-time lump sum payment to reward their shareholders. The board of directors is responsible for decisions relating to the distribution of profits, which are carried out in agreement with the main stakeholders.
These are decisions based on the type of shareholders, the state of the company’s earnings and the type of issue, among others. For example, preferred shareholders have a greater right to these
profits than common shareholders of the company.
Chronology of the issuance of dividends
The frequency of issuance of dividends may be monthly, quarterly, annual or semi-annual and requires compliance with a schedule. A company marks certain dates on its calendar to make public announcements and also to track distribution details. The
The Board of Directors, with shareholder approval, is responsible for these decisions. Let us guide you through them.
Announcement / Declaration date: an important element of the calendar, the management of a company announces the next dividend distribution with the declaration date. The amount of the payment or the type of issue is also decided by the board of directors.
ExDividend Date: can be regarded as a deadline, prescribing the eligibility of shareholders to receive them. For example: if a particular share declares that the deadline is July 30, 2021, only shareholders who own the shares on July 30, 2021, will be eligible to receive payments. Investors who buy the shares on July 30 and thereafter will not make the cut.
Date of registration: The company decides on the list of shareholders who will receive the payment and is postponed to the date of registration. The amount of the payment or the type of issue is also decided by the board of directors.
Payment date: This is the date on which payment is made by the company to registered shareholders by direct bank transfer or by post depending on the type of issue.
Types of dividend
Here they are paid as cash either through a check or direct bank transfer.
Here the company issues common stock to the present common shareholders. The treatment depends on the percentage of an issue concerning the number of the entire previous share issue. If the issue is more than 25%, it will be treated as a stock split
Companies also grant physical assets, real estate, investment securities etc., to their shareholders. They must record the distribution at the asset’s fair market value. If the fair market value of the assets distributed is different from the book value of the assets, then the company has to record the variance in the form of the gain or loss.
It is a type of promissory note where the company commits to paying the shareholders at a later date. Then, it creates certain notes payable, which may or may not include interest.
It is a payment that allows shareholders to receive their originally contributed capital, primarily at the time of business liquidation.
Pros and Cons
Dividends often increase investor confidence, as these companies are viewed as more stable, profitable and reliable. Plus, with regular payments, shareholders don’t feel the need to sell their stocks for quick returns.
This is an essential source of income such as retirement income. For example, when Royal Dutch Shell reduced these payments after Covid19, it was to affect many retirees who owned the shares either directly or through programs.
In addition to being a sign of gratitude, they keep shareholders invested in the business through regular profits. People tend to invest more in these stocks, driving up their prices and increasing their capitalization.
In addition, eligible dividends that are considered as such by the SEC are taxed at lower rates because they are treated as long-term capital gains.
Some companies may claim the deduction of dividends received. It is a type of tax deduction that some company
