A dividend is a company’s distribution of earnings to its shareholders, determined by its board of directors. Dividends are often distributed quarterly and may be paid out as cash or reinvested into additional stock.
Key Takeaways
- A dividend is a distribution of corporate earnings given to shareholders.
- The board of directors decides on the payment and amount of dividends.
- The dividend yield represents the dividend per share, expressed as a percentage of a company’s share price.
- Some companies prefer to retain earnings for reinvestment rather than paying out dividends.
Understanding Dividends
Dividends must be approved by shareholders through voting rights and can be issued either as cash or additional shares of stock. Various mutual funds and ETFs also pay dividends.
Dividends serve as a reward to shareholders for investing in a company and originate from the company’s net profits. For the company, dividends represent a liability, but for investors, they are an asset. Companies might also pay dividends to maintain their distribution track record even in low-profit periods.
Dividends can be paid monthly, quarterly, annually, or as non-recurring special dividends. For example, Walmart and Unilever make regular quarterly payments, while United Bancorp declared a special dividend of 15 cents per share.
Dividend-Paying Companies
Often, more significant, established companies with steady profits are reliable dividend payers, including sectors such as:
- Basic materials
- Oil and gas
- Banks and financial
- Healthcare and pharmaceuticals
- Utilities Companies like MLPs and REITs are required to distribute dividends. Startups, often found in tech or biotech, typically don’t offer regular dividend yields as they reinvest earnings into research, expansion, and other needs.
Important Dividend Dates
The timeline of dividend payments involves key dates to determine eligibility.
- Announcement date: The date on which the company officially declares the dividend.
- Ex-dividend date: The date when dividend eligibility expires. Buyers on this date won’t receive upcoming dividends.
- Record date: The date when the company determines eligible shareholders for the dividend.
- Payment date: The date the dividend is paid out to shareholders.
How Do Dividends Affect a Stock’s Share Price?
For instance, if a company trading at $60 per share declares a $2 dividend, the share price may increase to $62. On the ex-dividend date, it adjusts by the dividend amount, opening at $61 if it was $63 the previous day.
Why Do Companies Pay Dividends?
Dividends reward shareholders and reflect positively on a company’s trustworthiness and profitability. High dividends can suggest good profits but may also indicate a lack of profitable reinvestment opportunities. However, dividend cuts could either signal financial trouble or be a strategic decision for reinvestment.
Fund Dividends
Funds like bond or mutual funds pay dividends based on their Net Asset Value (NAV) and are derived from interests and capital gains. Regular payments should not imply excellent fund performance but merely compliance with operational returns.
Are Dividends Irrelevant?
Economists Merton Miller and Franco Modigliani argued dividends are irrelevant to a firm’s stock price and cost of capital, suggesting investors can create their desired cash flow by buying or selling shares regardless of dividend policy. Nevertheless, dividends remain attractive for the additional earnings they offer.
How to Buy Dividend-Paying Investments
Investors can choose dividend-paying stocks, mutual funds, or ETFs. Analytical models like the dividend discount model or Gordon growth model use expected dividends for stock valuation. Key comparison metrics include dividend yield and total return factor, which account for interest and capital gains. Tax considerations also play a role in deciding dividend investments as tax treatment varies by jurisdiction.
How Often Are Dividends Distributed to Shareholders?
Typically, dividends are distributed quarterly; however, some companies may opt for semi-annual payments. Distributions can be in cash or reinvested into the company’s stock.
What Is an Example of a Dividend?
If a board issues a 5% annual dividend on a $100 share, the dividend is $5. Quarterly distributions would then amount to $1.25 per period.
Why Are Dividends Important?
Dividends often indicate stable company performance and generate recurring investor revenue. They also provide insight into a company’s intrinsic value. Many countries offer a tax advantage for dividends, treating them as tax-free income.
Related Terms: dividend yield, ex-dividend date, retained earnings, board of directors.
References
- Accounting Tools. “Dividend Yield Ratio Definition”.
- PwC. “U.S. Financing Guide: Chapter 4: Common Stock and Dividends: 4.4 Dividends”.
- Unilever. “Dividend History”.
- Walmart. “Dividend History”.
- United Bancorp. “United Bancorp, Inc. Declares a Quarterly Cash Dividend of $0.1625 per Common Share Producing a Forward Yield of 4.42% and Announces a Special Dividend Payment of $0.15 per Common Share”.
- U.S. Securities and Exchange Commission. “Updated Investor Bulletin: Master Limited Partnerships – An Introduction”.
- U.S. Securities and Exchange Commission. “Real Estate Investment Trusts (REITs)”, Page 1.
- Code of Federal Regulations. “Title 12, § 707.2 Definitions”.
- Yahoo Finance. “AT&T Inc. (T): Historical Data”, Date Range: Jan. 24, 2022 to Feb. 3, 2022.
- AT&T. “AT&T to Spin Off Interest in WarnerMedia to Shareholders”.
- Financial Industry Regulatory Authority. “Mutual Funds: Overview”.
- The Nobel Prize. “This Year’s Economics Prize Awarded for Pioneering Studies of Saving and of Financial Markets”.
- Tax Foundation. “Dividend Tax Rates in Europe”.
- InvestHK. “Tax Basics”.
- Internal Revenue Service. “United States Income Tax Treaties - A to Z”.
- S&P Dow Jones Indices. “Withholding Tax Rates”.
