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What Is A Dividend?

A dividend is a regularly scheduled distribution of profits to eligible investors or shareholders in a company as determined by the board of directors. These payments on the earnings are typically made yearly or quarterly by publicly listed companies to reward their investors for their financial commitment, and the payment could be in the form of cash or additional stock.

Once dividend payouts are announced, the company’s stock price correspondingly reduces or increases.

The company has the option of either paying dividends or reinvesting the accumulated retained earnings into the business.

Dividends could be paid as ordinary dividends, special dividends, or stock dividends upon approval on a date known as the ‘payable date.’

The dividend yield is calculated as the annual dividend per share divided by the share price.

Deeper Definition

Cash or stock distributions to shareholders in a company are regarded as dividends.

They are typically sourced from a company’s retained earnings but could still be issued if negative retained incomes are posted.

Some dates are essential in determining whether or not an investor gets dividends from a company. They will be itemized and explained below:

Announcement Date: It is also known as the declaration date, and it is the date when the company management announces dividends. The shareholders must approve it before they can be paid.

Ex-dividend Date: This is the expiry date of dividend eligibility and is also referred to as the ex-date. Purchase of stocks ON or AFTER the said date will lead to disqualification from obtaining the stocks. Those who get the stocks one business day beforehand will be considered eligible.

Record Date: It is when the board of directors determines which shareholders will receive dividends along with the financial information relevant to the payout.

The cycle for dividends typically involves:

Generation of profits or retained profits

The decision of the management board to pay out some excess profits to shareholders

Approval of the planned dividend

Announcement of the dividend, including the value per share, the date when it will be paid, record date, e.t.c.

Dividend Example

If a company posts comfortable net profits, it may decide to pay its investors dividends.

If a 3% dividend per share is agreed annually, and the company’s share worth is $100, the dividends will be worth $3.

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