Share Market

A dividend is the summed up portion that is returned back to the shareholders when the company earns a profit. They provide an added incentive in the form of a return on investment. Even when a company is not earning much of a profit, the stable companies earn enough to give its shareholders a portion of their investment. There are certain cases where the companies whether mature or young diligently pay their stockholders a regular dividend.

Dividends are distributed amongst the stockholders because it is a way of passing on the companies’ profits directly to them. The dividend in most cases comes to the company in the form of cash. However, it is not unheard of companies that pay its dividends in the form of stock. Dividends can be determined by a fixed rate called preferred dividends, or a variable rate based on the company’s latest profits known as common dividends. It must be understood however that a company is under no way obligated to pay dividends; they will almost always pay dividends to its preferred shareholders unless the company is experiencing financial troubles.

When talking of dividends one must remember three dates: First the declaration date, on which the company decides the dividend payment date, the amount of the dividend, and the ex-dividend date. Second the record date, on which the company compiles a list of all current shareholders, all of whom will receive a dividend check. For practical purposes, there is a more important date called the ex-dividend date, without dividend, which occurs 2 days before the record date. Now, the ex-dividend date was created to allow all pending transactions to be completed before the record date. The ruling principle is that if an investor does not own the stock before the ex-dividend date, he or she becomes ineligible for the dividend payout.

Also, for all pending transactions not completed by the ex-dividend date, the exchanges automatically reduce the price of the stock vis-à-vis the dividend amount. This is basically done because a dividend payout automatically reduces the value of the company as it is coming from nowhere else but the company’s cash reserves.

The basic appeal of dividends is that it offers a consistent return on a low-risk investment. Plus, as the company grows, the dividends themselves may/may not grow, adding on to the value.