Dividends are a part of the profits that a company make in a financial year and decide to share with all its shareholders. Every share or stock has a certain dividend value which is announced at the annual general meeting or the meeting with shareholders. Usually, it is an executive decision with the entire board of directors having a vote. Companies can be generous and announce handsome dividends after a great year. They can announce no dividends for years if there isn’t enough profit or if they are incurring losses. Let us explore the dynamic concept of dividends.
- Companies have different approaches to deciding on dividends. You must understand these differences if you are to pick the most rewarding stocks. There are growth oriented companies that would hold onto the profits to finance expansion and scaling. This prevents them from paying handsome dividends. They may not pay any dividend at all, despite churning a profit. There are yield companies that have done fairly well for years, if not decades, and don’t need more funds to expand. They would happily share the spoils with the investors who have stood by them, dividends.
- As a smart investor, you must learn a bit more about dividends than just the amount being announced for a given year. There’s dividend yield ratio which is essentially the number of dividends divided by the present share price. You would typically get to know the dividend yield ratio from the press release and you can calculate the earnings you would have depending on the number of shares you own.
- Dividends aren’t necessarily paid once a year. Many large-cap companies will pay dividends once every six months, there can be interim dividends and a final dividend at the end of the financial year. Listed funds can pay quarterly and small companies usually don’t pay any dividends till they grow and amass a certain ready capital. Companies can always choose to pay special dividends to motivate investors or to retain shareholders. They can also pay special dividends when there are windfall gains. There’s another type of dividend known as franked dividends, which are essentially paid by companies after they have filed their taxes. Once the taxes on profits are paid, companies may choose to announce a certain dividend, which will also allow shareholders or investors to get a credit on the tax paid.
- Get accustomed with a few important terms, like ex-dividend date, record date, payment date and dividend reinvestment plan.
