Dividends
One of the benefits of owning shares in a profitable company is that you may earn regular dividend payments on your investment. Dividends are in essence a share of the company's profit that is split proportionately amongst all of the eligible shareholders. Dividends may be paid out in cash, be offered as additional shares, or in some cases may even be offered as store credits (as is the case with retail co-operatives). Dividends are not guaranteed, however - regardless of whether a company makes a large or small profit, it is the board of directors that decides on whether or not to pay shareholders a dividend and further what value dividend will be given.
Dividend Payments And Frequency
Dividend payments are one of the foundations of share investment, especially for so-called 'mum and dad' investors and people with blue-chip portfolios who rely on the extra income that dividends provide. Some investors choose the companies they invest in by their history of dividend payments, although there is never a guarantee that such companies will continue to follow their dividend payment trend.
Dividends may be paid on a yearly or twice-yearly basis, with further 'special' dividend payments being issued whenever the company deems it necessary. These payments are referred to as either belonging to the regular dividend cycle (on an annual or semi-annual basis) or being an additional special payment. Another element of dividend payments is that they do not have to be paid out in cash - they may be paid instead in additional shares, known as stock or scrip dividend payments.
Dividend Cover And Retained Earnings
Companies may opt to pay a portion of their profit as dividend payments to shareholders rather than paying out the majority or entirety. An indicator that is used in reference to dividends is the dividend cover, that is, how many times over the company could have paid their allocated dividend payments to shareholders from the profit the company had made or conversely whether they are paying shareholders a higher dividend than their profit actually allows. A common reason that companies do not pay out as high a dividend as their profits can afford is that they choose to reinvest their profits to further the growth of the company, and this is known as 'retained earnings'. Some investors recommend avoiding companies that pay out large dividends to share-holders as they believe it suggests the company has no further plans for growth or expansion; instead these investors suggest looking for companies with a higher rate of retained earnings as an indicator of larger profits in the years to come.
Important Dates
When a company decides to release dividend payments to shareholders there are four dates on the dividend payment schedule that both the board of directors and the shareholders need to take note of. The first important date is the Declaration Date, which is the day on which the board announces it intends to give dividends to its investors.
Once the announcement has been made an increased interest in the buying of the company’s shares may result in an influx of investors, and this is why the second date, known as the Ex-Dividend Date, is important: the Ex-Dividend Date is the day after which those who buy or sell their shares will not be included in the current dividend payment. Share prices may drop after the Ex-Dividend Date because their perceived value is less than it was when it would have entitled the shareholder to a dividend payment.
The third date of importance, particularly for new investors in the company, is the Record Date, the day by which all shareholders need to have registered their ownership with the company secretary if they intend to claim a dividend payment. Finally the Date of Payment is worthy of note for all involved.