What is a Dividend?

In simplest terms, a dividend is a portion of a company’s profit that is typically issued to shareholders as a cash payment.

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When are dividends paid?

Dividends can be paid in variety of intervals. Quarterly is the most common payout period. However, some dividends may be paid monthly, semi-annually, or annually.

Special dividends

Occasionally, companies will pay a special, one-time payment. This payment is often related to a specific event that has given the company a greater amount of profits to share. A special dividend is separate from a company’s recurring dividend cycle (if they have one) and will usually be a bigger payment than the normal dividend. Special dividends may also be paid in shares rather than in cash.

Do all companies pay dividends?

Not all companies pay dividends, but many find it to be a good use of their profits. So, it is beneficial to look at dividends from a company’s perspective.

The primary objective of any company is to make money. To do that, they must have a good or service to sell. Through sales, a company creates revenue that they can use to maintain the primary operations of their business.

Of course, all businesses have expenses. They must pay for the materials that go into their product, salaries of their employees, mortgages or rent, and many other operating expenses. After they have used their revenue to pay their expenses, they are left with their earnings or profit.

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What do companies do with excess money?

Companies can focus on growth and reinvest their profits to help expand sales. Many companies spend a good deal of their earnings building new factories, expanding operations, or on research and development to enhance or even create lines of business.  This is common for young “growth” companies. 

Companies can also keep part of their profits. It is with these retained earnings that they can pay a portion of their profits back to their shareholders in the form of a dividend.

It’s important to know that not at all publicly traded companies pay out dividends to their shareholders. Furthermore, not all dividend-paying companies pay the same amount or handle the payments in the same manner. Choosing the right dividend paying stock for your portfolio will require some research and due diligence on your part.

Process of receiving a dividend payment

For investors, the process of receiving a dividend payment starts when they buy shares of a dividend paying company. At the end of each quarter, the corporation will review their financial performance. Based on that performance, the Board of Directors may decide to issue dividends and subsequently determine how much the dividend payment will be. Keep in mind, even if a dividend paying company falls short of their goals, they will likely still issue a dividend.

Most dividend paying companies build their payment into their long-term strategic plan.  Since shareholders often buy their stock for a dividend and rely on the payment, they generally commit to a consistent dividend strategy.  Companies focused on paying regular, growing dividends each year make the best holdings for a long-term dividend investor. 

After the Board of Directors determines the dividend, they will declare the upcoming dividend payment. This announcement will include how much that dividend will be per share, as well as the timeline for the dividends including the ex-dividend date, record date, and payment date.

The final step in this process is that you, the shareholder, receive your dividend payment.

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