How Are Dividends Paid?
When it comes to choosing investments, one of the most important things to consider is your expected return. Stock investors can make money through capital gains when stock prices increase. But some can also make money from dividends, even if the stock price falls.
There are several good reasons that companies may choose to issue dividends, including rewarding current shareholders and attracting new investors. But some companies choose not to pay dividends and to instead spend their profits elsewhere.
In this article, we’ll break down what a dividend is and why some companies pay dividends while others don’t.
What Is a Dividend?
A dividend is a payment that a corporation pays to its shareholders. These payments are a portion of the company’s profits that it passes on to its investors. Dividends are usually paid in the form of cash, but companies may also pay their shareholders in the form of stock or another type of property.
TIP:- Someone who owns a company’s stock is considered a “shareholder.”
Certain types of stock are more likely to result in dividend payments. For example, preferred stocks are more likely to pay dividends than common stocks; and income stocks pay dividends consistently, while growth stocks rarely do. Dividends are usually paid on a fixed schedule. Those that aren’t are referred to as “special” or “extra” dividends.
Why Do Companies Pay Dividends?
Dividends are one of two primary ways that investors earn money through stock investing; the other being capital gains. And while dividends can be enticing to investors, not all companies pay them. Let’s discuss why companies pay dividends, as well as a couple of reasons why a company might not.
Sharing Profits With Investors
Simply put, dividends are a way for companies to share their profits with investors. Companies can use dividends to reward investors and entice them to stick around. But for a company to share profits with investors, it must actually have profits to share. As a result, dividends are most common from well-established companies that generate consistent revenue. Stocks of such companies are usually known as income stocks and pay regular dividends.
Attracting Investors
Dividends can be an excellent way of attracting investors since they know they’ll have recurring income from the stock regardless of what happens with its share price. Dividends are an especially important tool during seasons when share prices are stagnant or decreasing, as investors still have a way to make a profit. In fact, dividends can entice more investors during these seasons, causing the company’s stock price to increase.
Why Companies Don’t Pay Dividends
So, if dividends help to attract and maintain investors, why don’t all companies pay them? While there are solid reasons that companies choose to pay dividends, there are also good reasons why some don’t.
First, when companies pass their profits on to the shareholders, they aren’t reinvesting them back into the company. And ultimately, those reinvestments can help the company to grow, thereby increasing the stock price.
Dividends are less common among startups and other growing companies that must reinvest in the company to grow. These stocks, known as growth stocks, are often considered a good trade-off for investors because they expect significant capital gains.
NOTE:- A company may pause dividend payments—or eliminate them entirely—due to financial hardship.
In the wake of the auto industry crisis and the company’s bankruptcy, General Motors stopped making dividend payments on its common stock. It wasn’t until six years later, in 2014, that the company resumed payments.2 Similarly, the company announced in early 2020 that it would be pausing dividends on its common stock to help preserve cash.3 As of May 2021, it hasn’t resumed these dividend payments.
Types of Dividend Payments…!!!
Most companies pay dividends in the form of cash at a certain price per share. For example, if you own 100 shares of stock in a company that issues dividends at $0.50 per share, then you would receive a $50 dividend payment.
Some investors choose to reinvest dividends in additional company stock via a dividend reinvestment plan (DRIP). Instead of receiving dividends as cash, they’re used to automatically purchase fractional shares of common stock. Fractional shares are just what they sound like—a fraction of a share. Over time, fractional shares can add up to increase your overall investment in the company.
Ex-Dividend Dates
A company’s ex-dividend date is what determines whether a shareholder will receive a dividend. Shareholders who purchased a stock before the ex-dividend date will receive the next dividend payment while those who purchased the stock on or after the date will not.
TIP:- “If a shareholder didn’t purchase a stock in time to receive a dividend, then the investors who sold them the stock will”.
IF YOU’R NEW TO SHARE MARKET SO CONCEPT OF DIVIDEND IS MOST IMPORTANT FOR YOU. BECAUSE NOT IMMEDIATELY BUT AFTER LONG TIME IT’LL HELP YOU LOT.
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