You will know the word, but do you know what it refers to. We asked – what are dividends?
Standard Definition
Dividends are payments a corporation makes to its shareholders, usually in the form of cash or additional shares of stock. The company typically distributes such payments out of the company’s profits, and are meant to reward shareholders for their investment in the company.
What Are Dividends? Payments
Businesses can pay dividends on a regular basis, such as quarterly or annually, or they can pay them as a one-time special dividend. The company’s board of directors typically determine such payments, and may depend on factors such as the company’s financial performance, growth prospects, and capital needs.
What Are Dividends? Their Importance
Dividends are an important source of income for many investors, particularly those who are retired or who rely on their investments for income. They can also serve as an indicator of a company’s financial health and management’s confidence in its future prospects.
What Are Dividends? Caution Needed
It’s important to note that not all companies pay dividends, and that you should not assume a company association guarantees you dividend payments. Companies may choose to reinvest profits back into the business rather than pay out dividends. Alternatively, they may suspend or reduce dividend payments in times of financial difficulty.
Business Requirements
For each dividend payment the company makes, you must write up a dividend voucher showing the:
- date
- company name
- names of the shareholders being paid a dividend
- amount of the dividend
You must give a copy of the voucher to recipients of the dividend and keep a copy for your company’s records.
Share Prices
If a corporation announces a surprise increase in dividends, the share price may climb. After a company pays a dividend, a company’s stock price will probably decrease by that amount. Due to investors’ desire for higher dividend yields, dividend payments may also have an impact on the share prices of rival companies.
Investors naturally feel a thrill at the prospect of a company supplying them with dividends. Thus, they wish to buy additional shares before the pay-out. As a result, an issuing company’s share price will often increase. If the share price decreases instead, it can be because the corporation issuing the dividend anticipates paying the shareholder out of existing reserves.
