Dividend Definition. What are dividends and what determines dividend payments?
What are dividends?
A dividend is the distribution of profits; this typically results from the company’s success in annual operations or certain investment activity. Dividends are jointly declared by a company’s board of directors, and can be paid to shareholders in the form of cash or as additional shares of stock.
What is a Dividend
Cash dividends are usually more common than stock dividends. Stock dividends would usually be declared when the company wants to invest the cash generated from company operations to recapitalize the company. However, stock dividends do not actually affect the assets and liabilities of a company.
Nonetheless, there is a common misconception you can take advantage of: many people mistakenly believe that when a company elects to pay stock dividends, it would be able to preserve its cash and reinvest more to grow the company. Thus, many stocks tend to trade higher after a stock dividend has been declared.
How large would your dividend be?
Your share of the total dividend payout would depend directly on the proportion of the company’s shares you hold; the more of the company’s shares you hold, the more dividends you would earn.
What determines dividend payments?
Generally, management needs to make the decision between distributing earnings to its shareholders or reinvesting all earnings to further grow the business. The payout ratio refers to the ratio of dividends paid out to investors versus the amount of earnings retained.
Dividend increases will also almost certainly led an increase in earnings, as the company’s management will want to be certain that the higher dividend payment will be sustainable. Also, one point investors should note is that companies are usually reluctant to reduce dividend payments, since that would be seen as a sign of financial weakness.
Dividend Definition: Empirically, it has been observed that there is an inverse relationship between dividend yield and stock prices.