What Is A Dividend?
A dividend is a portion of earnings, that a company distributes to its shareholders. When a company makes a profit, they keep some amount of profit as retained earnings and invest that amount in the business for its growth, and the rest amount is distributed to the company’s shareholders as dividends.
Dividends are generally paid in quarterly, half-yearly and annual basis. It is important to know that, not every company pays dividends. The company’s board of directors decides, whether to pay the dividends or not.
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How Dividends Works
Dividends are paid on every share (Per share basis) and it is paid equally to all its shareholders like equity shareholders and preferential shareholders. Along with stocks some mutual funds and ETFs also pay dividends.
When a company announces dividends, they announce a certain date, when dividends will be paid, the date is known as the payment date.
Types of Dividends
Based on dividend payment modes, there are several types of dividends. Those are:
- Cash: This is the most common type of dividend pay-out method. Companies direct pay their shareholders by cash directly to their bank account (wire transfer) or by cheque.
- Stock: Company pays dividends to its shareholders in the form of shares by issuing new shares, that are issued and adjusted on the basis of the stock price at a certain date.
- Special Dividends: When a company has excess cash in their balance sheet they generally distribute some money in the form of dividends to its shareholders, known as special dividends.
Important Dividend Dates
Payout of dividends occurs in sequential orders with different dates.
- Announcement Date: On the announcement date a company and its management announce the dividends and their amount.
- Ex-Dividend Date: Ex-dividend date or also known as ex-date is the date, when the dividend eligibility expires. For example, if the ex-date of dividend payment is Oct 24, then those who buy that share after Oct 25 will not be eligible for a dividend.
- Record Date: The record date is the cut-off date set by the management, to decide who is eligible and who is not to receive the dividend.
- Payment Date: The dividend payment date is known as the payment date when the shareholders receive their dividend money.
Impacts of Dividend on Stock Price
After the payment of dividends, the stock price of the company adjusted according to the value of dividends. For example a stock is quoting at $50 and the company pays a dividend of $4, then the stock price adjusted to $46. This is called the dividend discount.