Dividends are regular payments a corporation can choose to issue to its shareholders, with the amount of payment to each shareholder commensurate with their number of shares. They may be paid as cash, additional stock, or property.
When it is time to make dividend payments, corporations always pay preferred stock owners first, and then common stock dividends are allocated after all preferred dividends are paid in full.
Dividends May Be Allocated In Different Forms Of Payment, Outlined Below:
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Cash Dividends are the most common. As the name suggests, these are paid out as currency via electronic funds transfer or a printed paper check. For each share owned, a declared amount of money is distributed. Thus, if a person owns 1000 shares and the cash dividend is Rs. 9 per share, the holder of the stock will be paid Rs. 9000.
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Stock Dividends (also known as scrips) are payments in the form of additional stock shares of the company itself or one of its subsidiaries, as the name suggests. This may be a more palatable option for companies who would prefer to use its earnings towards growth of the company, rather than diverting them into cash dividends for shareholders stock. Example- ABC Ltd. announces a stock dividend of 10%. In this case, every shareholder receives 10 additional shares for every 100 shares they hold or own. Therefore, for the 1,000 shares you hold, you receive 100 shares as a dividend.
Nature Of Dividends:
The nature of dividends may appeal to investors because they offer consistent returns on relatively low risk investments. While companies experiencing rapid growth are unlikely to offer dividends, established companies with stable business and less room to grow do pay dividends to shareholders. Despite the low earnings growth of these stocks, shareholders get the benefit of knowing that the value of their initial investment is likely to remain stable. They can still profit off a steady stream of dividend payments.
Dividend payments are made to shareholders holding shares on a particular day. There are a few dates that are important for dividend payments.
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Announcement Date: Companies announce dividend payments on this date.
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Record Date: Date on which the company makes a list of shareholders who are eligible to receive the dividend.
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Ex-dividend Date: Date on which the dividend eligibility date expires. All investors buying the share on that day or after this day will not qualify for dividend payments.
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Payment Date: Date on which the dividend is credited to the shareholder’s accounts.
Conclusion
Dividends are a vital component of shareholder returns, offering a regular income stream from a company’s profits. They serve as an indicator of a company’s financial health and stability, rewarding investors for their equity ownership. Companies that consistently pay dividends often attract long-term, income-focused investors, enhancing shareholder loyalty. However, dividend policies can vary, with some firms reinvesting earnings for growth instead of distributing them. While dividends provide financial benefits, investors should also consider overall company performance and growth prospects. In conclusion, dividends are a valuable tool for wealth creation, especially when combined with capital appreciation.
