Dividend: what it is and how it works

The dividend is a concern of several investors. It is not simply the amount of money a company pays to its shareholders, but it is also an indication of a company’s valuation and valuation. If you are investing in stocks, you need to know what a dividend is, how to receive dividends, and other issues related to dividend distribution. Let’s find out more in this article below.

What is a dividend?

Dividends are payments that a company distributes its earnings to investors. When the company’s business makes a profit, most of the profits are kept as retained earnings, which are used for the company’s current and future business activities. The rest is paid to shareholders, called dividends. Not all stocks, however, pay dividends.

A dividend per share of shares is paid. The more shares you own, the more dividends you get paid. For example, you own 50 shares of Apple, and Apple pays $0.80 in annual cash dividends, you will receive $40 per year.

Some companies pay dividends to shareholders in cash. Others pay stock dividends, and shareholders receive additional shares issued.

Types of dividend payments

There are several types of dividends that a company can choose to pay to its shareholders. However, two main ways of paying dividends are:

  • Cash dividends
  • Stock Dividends

Payment of dividends in cash

The cash dividend is a common way for companies to return capital directly to the shareholder’s brokerage account in periodic cash payments.

Cash dividends are often paid regularly, for example monthly or quarterly, but sometimes they are one-time payments, for example after a settlement.

Companies that pay cash dividends typically enjoy stable cash flows, and their businesses are commonly beyond the growth stage.

Payment of the share dividend

Although cash dividends are the most common, dividends can also be issued as shares of shares.

With this form, companies pay additional shares to their shareholders instead of cash dividends and keep their profits to reinvest in their business. So, this practice is also known as dividend reinvestment.

Important dividend dates to know

There are four important dates you need to keep in mind:

  1. Announcement date: The date on which the company’s management announces its intention to pay dividends. The Board of Directors also communicates the value of the dividend, the ex-dividend date and the dividend payment date.
  2. The ex-dividend date: You will not be entitled to dividends if you buy shares on this day or after this date. Only holders of shares prior to the ex-dividend date will receive dividends.
  3. The date of registration: when the company checks the records to see who is eligible to receive the dividend. The record date is one business day after the ex-dividend date.
  4. Dividend date: when dividends are actually paid to the company’s shareholders (applicable to real assets).

The way to receive dividends is quite simple. To receive dividends, simply hold shares before the ex-dividend date.

If the shares you hold are listed, dividends will be paid directly to your trading account.

If you hold unlisted (OTC) shares, you need to contact and go directly to the company to receive dividends.

What does the dividend tell us?

Dividends show the company’s prospects

A company’s ability to pay steady dividends and its ability to increase dividends represent its positive outlook.

However, this does not mean that companies that do not pay dividends are not unprofitable. If the company believes its growth opportunities are better than other investment opportunities available to its shareholders, it will keep the profits and reinvest them.

Dividend policy affects the share price

Dividend policy is always an issue that attracts the attention of investors, which significantly affects the share price of a company. Before paying dividends, the issuing company must first announce the amount of the dividend and the date of payment of the dividend to shareholders. The announcement of dividends – periodic investment income is also a way to “stimulate demand” to encourage investors to buy and maintain their shares. Dividends also represent a company’s business results because they are issued from the company’s profits. The more financially stable the company is, the higher the dividend and the more shares investors hold, the more dividends they receive.

In addition, many people invest in a large number of stocks at certain times just to reap dividends. Some investors buy shares near the ex-dividend date and then sell them immediately. This is considered a way to receive dividends that can bring attractive returns to professional investors.

In any case, dividends are significant for investors seeking income from their stock investments. A thriving company will seek to maintain or increase its dividend to its shareholders from year to year. And when you learn more about dividends and how to receive them, you’ll understand why dividends are essential information when choosing stocks.

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