The dividend is a payment to the shareholders of a company from its profit. The more the company earns in a year, the higher the dividend rate will be to the share holders. In the case of preferred shares, dividends on such shares are paid irrespective of the profit of the joint-stock company. In order for a company to make a payment, it forms a special fund, to which it constantly transfers funds, so that, if the profits are not received, then the company can pay dividend.
Dividends can be very good source of continuous income to big and long term shareholders of a company. Many investors got their investment amount back in form of dividends.
What Is Dividend?
Dividends are the profit that shareholders receive on a certain basis from their company, which issued these shares. Investing in stocks, usually pay attention only to their course, the prospects for its growth and so on. A dividend is the distribution of a portion of the company's profit, decided and managed by the company’s board of directors and executives, and paid to its shareholders on quarterly or annually basis. Dividends are payments made by publicly-listed companies as a reward to investors for putting their money into the company.
Companies pay a part of their profit as dividend and rest of money is considered as invested back in the company. Dividends are paid on face value of shares. If a share holds face value on 10 rupee then a dividend of 150% means that shareholder will receive 15 INR/Share. Eligibility of a shareholder to receive dividend depends on record date and ex-dividend date for that company, record date is cut-off date when company records all the shareholders who holds its shares. If you buy one day after or sell one day prior to record date, you won’t receive any dividends. The date on which the dividend eligibility expires is called the ex-dividend date or simply the ex-date For instance, if a stock has an ex-date of Monday, May 5, then shareholders who buy the stock on or after that day will NOT qualify to get the dividend as they are buying it on or after the dividend expiry date.
Company in space of utility, Banking & Financial Sector, Healthcare, Basic Materials and government entities are known for higher dividend payout to its share holders.
Why Companies Pay Dividend?
Companies pay dividends for many reasons. These reasons can have different implications and interpretations for investors or shareholders.
Dividends are seen as a reward to its shareholders for their trust in a company. The company management may aim to honor this sentiment by delivering a robust track record of dividend payments. Dividend payments reflect positively on a company and help maintain investors’ trust that company is generating money to pay dividends.
A high-value dividend declaration can indicate that the company is doing well and has generated good profits. But it can also indicate that the company does not have suitable investment strategies to generate better returns in the future by using this money. Therefore, it is utilizing its cash to pay shareholders instead of reinvesting it into future growth.
If a company has a long history of dividend payments, a reduction of the dividend amount, or its elimination, may signal to investors that the company is in trouble so companies try their best to pay dividend as per past track record.
A reduction or denial in dividend amount may not necessarily translate into bad news about a company. It might be possible that company is planning to invest in itself or it is planning to expand, buy other company or doing provisioning for rainy day or some upcoming challenge in near future. Many economists don’t like idea of paying dividend they advocate for reinvesting and stock value elevation using dividend money.
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