What is dividend?
Dividend is the payment of profits to the shareholders. The purpose of paying dividend is attracting new investors. Dividend can also be seen as a reward for existing shareholders. Not all companies pay dividend however. Sometimes they decide to retain all profits and use them to invest or as a buffer against losses.
Shareholders are the co-owners of the company. As a reward for this ownership a company distributes dividend which is a certain amount per share. A company never pays all its profits to its shareholders. After all, in order to grow a firm needs to make investments and a large part of a company’s profits are used for this purpose.
Nevertheless, it is important for firms to regularly pay dividend to its shareholders. Without dividend shares can be less attractive for certain investors. This may lead to investors selling their shares and causing a drop in the share price.
How is the size of the dividend determined?
The size of the dividend is determined by the board but needs to be approved by the shareholders. They can either pay dividend in cash (cashdividend) or in stocks (stockdividend). The size of the dividend is often expressed in absolute terms but can also be relative (a certain percentage of profits).
Some companies decide not to pay dividend. Many large companies whose share price increases (almost) every year don’t think it necessary to pay dividend. Google and Apple are examples of such companies. The amount that a shareholder receives in terms of dividends also depends on the type of share: priority or preference shares may have different dividend percentages.
Influence of dividend on share price
Obviously, the payment of dividends influences the share price. At the so-called ex-dividend date it is determined who possesses shares and thus who has the right to receive dividend. After this date the share price immediately decreases. This decline is often similar to the value of the dividend. Taxes that reduces the actual dividend revenue can limit this decline.
Investing for dividend
Dividend is just another way to make money by holding shares. So despite a fall in share price it can still be possible to make profits. Especially when you hold shares for multiple years in an account dividend can significantly contribute to a positive yield.