What are Dividends ?
Updated on 24 Feb 2020
In the investment world, the term ‘dividend’ is used to describe the reward or return that a company pays to its shareholders. Our experts help you understand this term in detail.
What are Dividends?
The distribution of a reward that is a part of a company’s earnings and is paid to the class of the company’s shareholders is known as dividend. It is the board of directors of a company who decide and manage the dividends. However, the shareholders need to approve them by voting. Dividends are paid through cash payments, shares and other properties. They are not only paid by companies. There are various exchange traded funds (ETFs) and mutual funds that pay dividends as well.
Dividends are paid to shareholders as a token reward for their investment in the equity of a company or fund. It generally comes from the net profits of a company. The major part of the net profits is kept as retained earnings for the company’s ongoing and upcoming future activities. The remaining is allocated to the equity shareholders or investors as dividends. It is not uncommon for companies to pay dividends even if they have no profits. This is done to maintain their track record of issuing regular dividend payments, which has been established over time. It is up to the board of directors to choose the time frame for issuing dividends and their payout rate. Dividends can be issued frequently, every month, every quarter or every year. Dividend yield is the annual dividend every share divided by the price of the share.
What is the difference between Dividends and Buyback?
There are various types of distributions that the managers of a corporation can make to the investors or shareholders. Dividends and share buybacks are two of the most common.
When a company uses the cash at the end of the balance sheet to repurchase the shares that are present in the open market is known as share buyback. It not only returns the cash to shareholders, it also reduces the number of outstanding shares. It helps boost a company’s EPS.
What are the different types of Dividends?
Dividends can be issued by a company in a lot of different ways. Here are the various types with a brief description so that you know your options-
Cash – it is the most common way of paying the shareholders. The dividend may be wired or given directly through cash or cheque.
Stock – this type of dividend is paid by issuing new shares to the shareholders based on the shares an investor already owns.
Assets – a company can pay dividends in the form of securities, real estate, physical assets and so on.
Special – this is the case of excess build up of cash. It is not in the regular dividend policy of a company.
Other – dividends can also be paid through warrants, options or shares in a new company with the same parent company. However, these are not that common.
Why do Companies pay Dividends?
Companies pay dividends for a plethora of reasons that can have different interpretations and implications for investors. Here are the most common reasons why a company pays dividends to the shareholders –
Companies pay dividends to reward the shareholders for their trust.
Paying dividends creates a positive reflection of the company in the market.
It is also preferred by shareholders as dividends are treated the same as tax free income.
What is the difference between dividends by companies and dividends by funds?
There is a big difference between dividends by companies and dividends paid by funds. Companies pay dividends from the profits generated by the general operations. However, funds follow the principle of NAV (Net Asset Value). This reflects the price of the assets or the valuation of the funds holdings. As funds do not have natural profits, the dividends comes from the NAV.
To know more about the difference in dividends by companies and dividends by funds, get in touch with our financial advisors at Kristal AI. Their expertise coupled with artificial intelligence, will prove very beneficial for you and your investment.
What should you keep in mind while investing in dividend paying investments?
There are a number of investment options available for investors seeking dividend paying investments like mutual funds, stocks, ETFs and so on. Before investing in these, you should factor in their performance. The main factor is dividend yield, which measures the dividend percentage of the company’s share and its current market price. Another performance measure is to assess the return that is generated from a specific investment. Tax is another factor to consider while deciding on your investment.
Other facts about dividends
Every company follows a chronological process for dividend payment. These dates are very important to identify the shareholders who are eligible to receive the dividend payment. Here are the important dates –
Announcement date – on this date, the company announces the dividends, which are pre approved by the shareholders.
Ex-dividend date – this is the date, which is also known as ex-date, when the dividend eligibility expires. Only shareholders who buy the stocks before the ex-date are eligible to receive dividends.
Record date – this is the cut-off date where the company determines who will receive dividend or distribution.
Payment date – as the name suggests, on this date the company issues the dividends, which gets credited in the investor’s accounts.
To know more, get in touch with our expert financial advisors today!
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