Dividend

A dividend is a distribution of profits from a corporation to its shareholders. When a company earns a profit or a surplus, it can choose to pay a portion of that money to its owners. These owners are called shareholders. Any money the company does not distribute is kept to help the business grow. This money is known as retained earnings. These earnings are shown on the company's balance sheet under shareholders' equity.

Dividends are allocated as a fixed amount per share. This means shareholders receive a payment that is proportional to how many shares they own. For example, if a company declares a dividend of 50 cents per share and you own 100 shares, you will receive $50. While dividends can provide stable income and raise morale, they are not guaranteed. A company's board of directors has wide discretion to decide when and if to pay them. In many legal systems, courts do not interfere with these corporate decisions.

There are several different forms that a dividend can take. The most common type is a cash dividend. This is usually sent via an electronic bank transfer or a paper check. Another type is a stock dividend, which is also called a scrip dividend. Instead of cash, the company issues additional shares to the shareholders. For instance, a 5% stock dividend on 100 shares would result in 5 extra shares. These distributions do not change the total market capitalization of the company.

Some companies may issue property dividends, also known as dividends in specie. This means the distribution consists of physical assets or products. This might include securities from a subsidiary company or even specific services. A company might also use dividends to "spin off" a new business. In this case, they distribute shares of a subsidiary to the original shareholders. These new shares can then be traded on the market independently.

Different types of stock have different priorities for receiving these payments. Holders of preferred stock, or preference shares, have priority claims on a company's income. A corporation must pay the dividends on these preferred shares before it can distribute money to common shareholders. In cooperatives, the process is slightly different. Cooperatives often allocate dividends based on how much a member participates in the organization. In these cases, dividends are often viewed as a pre-tax expense.

History shows us that the concept of dividing profits is quite old. The word dividend comes from the Latin term meaning "thing to be divided." The Dutch East India Company, known as the VOC, was the first recorded public company to pay regular dividends. From 1602 to 1800, the VOC paid annual dividends for nearly 200 years. These payments were worth approximately 18 percent of the value of its shares.

Companies follow a strict schedule involving several important dates. First is the declaration date, when the board announces the intention to pay. Next is the in-dividend date, which is the last day to buy shares and still receive the payment. The ex-dividend date follows, where shares no longer come with the right to that specific dividend. The record date is when the company checks its books to see who the official owners are. Finally, the payment date is when the money actually reaches the shareholders.

Investors often use a Dividend Reinvestment Plan, or DRIP. This allows shareholders to use their dividends to automatically buy more stock. This can happen without paying a commission and sometimes at a small discount. Using a DRIP utilizes a principle called compounding. It also uses dollar cost averaging, which means investing a set amount at regular intervals. This helps investors buy more shares when prices are low and fewer when prices are high.

Finally, the frequency of these payments varies by country. In the United States, quarterly payments are very common. In Japan, the United Kingdom, and Australia, companies often pay semi-annually. In Germany, annual payments are the standard. To measure how much of a company's earnings are being paid out, analysts use the payout ratio. A ratio higher than 100% means the company paid out more than it earned that year.