Dividend definition

In stock trading and equity investment, a dividend is a regular cash payment to shareholders. Dividend-paying stocks provide income in addition to any capital gains from share price increases. Companies with a regular track record of making dividend payments are known as ‘dividend stocks’, and allow investors to capture some of the features of fixed-income investing within an equity portfolio.

Dividends are usually issued quarterly or annually, and they are paid out through a company’s common stock. There are several methods dividends can be paid out to shareholders. These include:

Cash: This is the most common type of dividend. Companies will often pay the cash directly into their stockholder’s brokerage accounts.

Stock: Instead of paying cash, some companies may opt for paying investors additional stocks.

Special dividends: These do not recur like regular dividends. Instead, a company typically issues special dividends to allocate any profits that have accumulated over the years for which they have no immediate need to spend on expansion or other ventures.

Dividend Reinvestment Programmes (DRIPs):  Investors can reinvest any dividends received back into a company’s stock, usually at a discount. DRIPs are not mandatory. Investors can also choose to receive the dividends in cash if they wish.

Why do companies pay dividends?

Dividends can be seen as a reward for shareholders’ investment in a particular company, and companies pay dividends as they can help to main the trust of their investors.

While a high-value dividend can also indicate that the company is currently doing well, a reduction in dividend amounts may not necessarily indicate bad news. For instance, the company’s management may have decided to invest the money into high-return projects that may potentially amplify the returns for shareholders in the long run.

Are stock-issuing companies required to pay dividends to their shareholders?

In short, no. Whether a company chooses to pay dividends to its shareholders depends entirely on their board of directors. Some fast-growing companies choose not to pay dividends, instead using its profits to fund its expansion and to work on other ventures. However, many large companies pay dividends as a way of retaining their shareholders’ loyalty.

Companies that opt to pay dividends may take one of three routes:

Residual: This is where dividend payments come out of leftover stocks after all project capital requirements are met.

Stable: This is where companies consistently pay a dividend each year regardless of how much they earn.

Hybrid: A company will establish a set dividend that is relatively small but can be easily maintained regardless of how the business does each year.

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