Money paid out to shareholders of a company as a way of sharing profits. Some blue-chip companies pay regular dividends, while many new and growth sector companies (dot-coms, for instance) invest all their profits in the company's growth. Mutual funds may also pay dividends to distribute dividends their holdings have received, or, with money market funds who have a constant unit value, to represent growth of capital. Many companies who pay regular dividends, and almost all mutual funds have a dividend re-investment program whereby investors can receive their dividend in the form of additional shares or units.

A dividend can also mean an additional receipt of something, usually food, eg, "John topped up his soup bowl with a dividend from the tureen."

go back to my big ol' finance metanode.

When an investor buys the shares of a company, he becomes owner of a part of that company. This means that he is taking a risk: if the company fails, he loses his investment. Of course, he is compensated for this by the fact that should the company prosper, it should become more valuable, and hence his part of the company should be more valuable as well. The shareholder has one problem, however: how should he unlock this profit? He can't ask for his money back, as a shareholder doesn't have a direct claim to the assets of the company. The shareholder will be paid in case that a company is dissolved, but companies normally only get dissolved after bankruptcy, and in this case, there almost never is any money left-especially for shareholders, as they get paid last in case of a bankruptcy. He might want to sell the share to another investor, but the other investor also can't get his money out, and hence might not want to pay anything for the shares.

In order to reward their investors, many companies issue a dividend. A dividend is a payment made to the shareholders. As the dividend is in essence the only thing a shareholder gets for being a shareholder, the expected future dividends may be an important driver for the long-term development of the share price. There are two main kinds of dividends:

  1. Cash dividend: In case of a cash dividend, the company pays a sum for each share. For instance, I own 300 shares of A. A pays 90 eurocents of dividend per share. Hence, I get 270 euros in my account. I may have to pay tax over this amount of money, though.
  2. Stock dividend In case of a stock dividend, the company pays its shareholders extra shares. For instance, I own 400 shares of company B. Company B pays a stock dividend of 1 share for each 44 shares held. In this case, I get 9 extra shares. I also have 0.09 share because of the roundoff; normally, I either get cash for this or can pay money to buy the rest of the partial share. It should be noted that making extra shares in this fashion in fact costs a company nothing; the only thing that happens is that the same capital is spread over a larger number of shares. This is similar to a stock split. Offering only a stock dividend is in a sense a bit of a "fake" dividend, as it still doesn't allow the shareholders to get money out of the companies. The tax rules for stock dividend may also be different.
Sometimes, a company also allows you to choose between a stock dividend and a cash dividend, or it may allow you to reinvest your dividend in shares of the company

The dividends mentioned above are typically issued once, twice, or, rarely, more than twice a year, or not at all in case the company pays no dividend or decides to skip its dividend. The procedure is as follows. First, the company proposes a dividend at the general meeting of shareholders. This proposal usually accepted. Then, a date called the ex-dividend date is picked. Usually, this day is just after the general meeting of shareholders. At this date, it is recorded how many shares each investor in the company own. The shares trade normally on this day, however, the share price is typically discounted with the value of the dividend. This makes sense; the company just distributed money equal to the dividend to its shareholders, and hence is strictly worth less. The shareholder now has dividend rights, which will be converted to cash or shares at a later date, the payment date. It is worth noting that many brokers charge you costs for receiving dividends, and these costs can be substantial. Furthermore, dividend rights do not accrue interest, while the cash paid does. This means the present value of the dividends becomes slightly lower when there is a large difference between ex-dividend and payment date.

So, dividends reward shareholders by giving them back money. However, they make the company the shareholders own worth less; the shareholders have been given back some of their own money! Worse, the company cannot use this money to invest and grow. Hence, as a shareholder, getting my money back is only good for me if I think I can make more money investing the capital elsewhere than if it were retained by the company. However, if this were true, why would I invest the money in the first place? According to this argument, a company should never pay a dividend. However, this would mean a shareholder could never get back his investment, making the shares essentially worthless.

If you were hoping for a clever solution to this catch-22, I have to disappoint you: as far as I know, there is no clear solution. We can, however, make the following observations:

  1. If a company is growing rapidly, it likely needs its capital bady in order to grow. There is little sense in distributing it.
  2. A relatively mature company might have more cash than sensible ways of investing it. In this case, it makes sense to pay a dividend. Companies that really have too much cash tend to opt for a special dividend: This is a (large) one-time dividend, outside of the regular dividend cycle.
These rules of thumb can be uses to see whether the dividend policy of a company makes sense: large, stagnant companies paying no dividend are to be avoided as investments, as they are apparently not very profitable. The same goes for small, growing companies paying a large dividend, as these companies are likely to have lots of debt and could easily go bankrupt. Companies issuing large special dividends are also suspect: if a CEO can think of no better use for large amounts of cash than to donate them to shareholders, he is in fact saying that other companies are more profitable than his.

It is worth noting that there is a second way in which companies can indirectly give back money to their shareholders. Some companies, rather than just give away money, buy back their own shares in a share buyback program. This rids the company of excess cash, and makes sure the assets of the company are distributed over less shareholders. This means the profit per share goes up.

Summarizing, dividends are a way for a company to reward its shareholders, who are in essence the investors in the company. It is normally the only way in which shareholders are rewarded for holding shares in the company, and hence, the prospect of future dividend may be an important driver in the long-term development of the share price. A disadvantage of dividends is the fact that they are being paid for by the shareholders themselves; this is reflected by the fact that shares usually lose value equal to the dividend after they have gone ex-dividend. Hence, there is no hard rule on whether high dividends are a good or a bad thing.

Div"i*dend (?), n. [L. dividendum thing to be divided, neut. of the gerundive of dividere: cf. F. dividende.]

1.

A sum of money to be divided and distributed; the share of a sum divided that falls to each individual; a distribute sum, share, or percentage; -- applied to the profits as appropriated among shareholders, and to assets as apportioned among creditors; as, the dividend of a bank, a railway corporation, or a bankrupt estate.

2. Math.

A number or quantity which is to be divided.

 

© Webster 1913.

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