Dividend

What Is a Dividend?

In this article, we are going to talk about Dividends and its importance for investors including how it works and we'll also discuss important dates regarding Dividends through an example for better understanding.

A Dividend is a part of a company's profits distributed to its shareholders

Dividends are usually paid quarterly, like a bonus to investors. But a company may pay out a Dividend at any time, which is called a special dividend.

How do stock dividend works?

A dividend is paid per share of stock. If you own 80 shares of a company that pays a $4 cash dividend per year, you will earn $320 each year. (Or)
If a firm pays a dividend of 15 cents per share, a $1,000 shareholder would get $150 in cash.

The company's board of directors must authorize each dividend. The firm will then declare the dividend payment date, the dividend amount, and the ex-dividend date. Usually, companies pay cash dividends to their investors.

Dividends are not guaranteed. They are at the board of directors' discretion. A company can choose to reinvest that profit back into the business. Now here a question comes to our mind that if the dividend is not compulsory then why do companies pay dividends?

  • The following are the reasons a company pay dividends :
    • Generally, Investors find dividend-paying companies an attractive investment.
    • Companies are making enough profit.
    • To maintain long-term trust within investors.
    • Reward to the investors.
    • Indication of the company's financial well-being.
    • It gives the company financial discipline.
Not every firm pays dividends, but those that do often have gradual, consistent growth.
Qualified dividends are taxed as capital gains instead of income, resulting in a reduced tax rate.



Types of dividends

There are several types of dividends a company can choose to pay out to its shareholders which are as follows:

  1. Cash dividend: The most common type of dividend. Companies generally pay these in cash directly into shareholder's accounts.
  2. Stock dividend: Companies can also compensate investors with additional shares of stock instead of cash.
  3. Dividend reinvestment program (DRIPs): DRIP investors can reinvest any dividends they receive into the company's stock, sometimes at a discount.
  4. Special dividend: Company may pay out a dividend at any time, which is called a special dividend. The company can distribute profits that have accumulated over several years and for which it has no immediate need.
  5. Preferred dividend: Preferred Dividends are a fixed dividends received from preferred stocks. That is, if you are a preferred shareholder, you will get a predetermined percentage of dividends each year. preferred shareholders get a higher rate of dividend.

Important dividend dates

Four dates are relevant regarding Dividends :

  1. Declaration Date: The day on which a company's board of directors declares its intention to pay a dividend.
  2. In-Dividend Date: The last day before the ex-dividend date, which is one trading day before. Existing shareholders and anybody who purchases a share on this day will get the dividend, but anyone who sells their shares forfeits their entitlement to it.
  3. Ex-Dividend Date: For investors, the Ex-Dividend date is critical. To get the dividend, investors must possess the stocks by that date.
    The dividend will not be paid to investors who acquire the shares after the Ex-Dividend date.
    Investors who sell after the Ex-Dividend date are still entitled to the dividend because they owned the shares as of the Ex-Dividend date.
  4. Record Date: To be eligible for the dividend, you must purchase the shares at least two business days before the record date, since the stock settlement and deposit in your depository will take two days.
  5. Payment Day: The day on which shareholders' dividends will be sent or put into their bank accounts.

For better understanding look out the table below :
On 10 August 2018, a company named ABC declares a dividend to be paid out on September 3, 2018 to its shareholders.

Declaration Date Ex-Dividend Date Record Date Payable Date
Friday,
10/08/2019
Friday,
17/08/2019
Monday,
20/08/2019
Tuesday,
03/09/2019

Typically, the Ex-Dividend Date is set one business day before the record date.
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