Dividend Definition

Dividends are distributions of company profit to certain shareholders. By paying dividends, companies allow their investors to enjoy some of the business earnings. Many companies don’t issue dividends, because they need the extra profit to reinvest back into the business.

What is a Dividend?

A dividend is a reward paid to shareholders (i.e., investors or owners) of a company. Dividends can be in the form of cash, stocks, or other property. Keep in mind, companies have no obligation to pay dividends, and only certain investors qualify for dividend payments.

How do dividends work?

The definition of a dividend is a payment of surplus profits to shareholders. That means a company must have extra earnings to pay dividends. If a company has leftover profits after paying its debts and creditors, there are two options: reinvest or pay dividends. Small businesses may need the extra cash to fund business operations, so they will put the profits right back into the company. More established businesses that are earning regular, predictable profits may choose to reward shareholders with dividend payments.

The company’s board of directors determines the dividend payment type and amount, and voting shareholders approve it. Dividends can be paid at different rates and different times, or the company may choose to regularly issue dividends.

Dividend payments are made based on a certain order of events. Knowing these four different dates helps to determine which shareholders are eligible to get a dividend. Read more about how dividends work.

Announcement date

The day that the company announces it’s paying a dividend is the announcement date.

Ex-dividend date

The ex-dividend date (or ex-date) is when the dividend eligibility expires. Shareholders who purchase a stock on or after the ex-date won’t get a dividend. Let’s look at an example. Say a stock’s ex-date is October 10. If a shareholder purchases some stock on October 10 (or any day after), they’re not eligible for a dividend payment. Now if a shareholder bought the stock on October 9,^, they would be paid a dividend.

Record date

The record date is like a deadline for determining which shareholders are eligible for a dividend payment. Company directors will look at the record date and figure out who qualifies for dividends as of the record date day.

Payment date

This is payday! On payment date, shareholders receive the money in their account.

What types of companies issue dividends?

Well-established and profitable companies with steady growth are more likely to pay dividends than businesses that need the extra cash to fund business activities.

Why do companies pay dividends?

Businesses pay dividends to entice investors and reward them for their contributions to the company. But remember, not all companies issue dividends, nor are they obligated to. 

Dividend Benefits

If a company needs more investors, showing them that the business regularly pays dividends may attract them. For existing investors, dividends may incentivize them to hold onto their stock.

Dividend Disadvantages 

By paying dividends, the company is choosing not to reinvest that money back into its operations. For a profitable company, that might not be a problem, but if your business is just getting off the ground, consider holding off on issuing dividends. 

Summary

To recap, the dividend definition is that they’re payments made to shareholders and are a way to share profits with investors. 

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