What are Dividends?
Dividends are monetary or stock rewards the company gives shareholders. It's important to know the advantages and disadvantages to see whether you should invest in a company. Read this article to find out more about dividends.
Definition of a dividend
A dividend is the distribution of the company’s earnings to shareholders. The value of a dividend is determined by the board of directors. Major shareholders can vote to approve or reject the amount or distribution of dividends. Dividends can be issued as either cash, stock or property shares.
The amount a shareholder is paid is based on the number of shares they own. For example, a company can issue shares with a 10% yearly dividend. Therefore, for a person who owns shares totaling to $100, they would receive a dividend amount of $10 each year.
Additionally, dividends are paid when the board of directors decide they should be issued. Usually, the company puts out a press release, and then pays shareholders within 30 days of the declaration. A company chooses how often a year they want to issue these payments. The general practice of major corporations is to issue this payment four times a year.
Advantages of dividends
If you invest in selling or buying shares, these prices will constantly change because it is dependent on the market. If you sell shares, it may not return as high a profit as you would expect. Dividends provide a steady and reliable payment for you simply by owning the shares.
Disadvantages of dividends
Dividends offer money or stock rewards for shareholders. Sometimes, shareholders may not use these rewards wisely when reinvesting. A company has much more resources for finding safe investments with high returns. An individual, on the other hand, may not be able to take this money or stock and reinvest it in other companies with as much profit.
Furthermore, the amount and distribution times are decided by the company, with no input from minor shareholders.
Why do companies pay dividends?
The main reasons for why companies pay dividends are to reach more shareholders, and show the public the company is doing well. It is important to note that companies can only pay shareholders when it makes enough profit, according to the Corporations Act 2001 (Cth). Companies can’t begin their business trying to pay dividends to shareholders. Instead, they have to use their profit for reinvesting and building capital.
Investors look at these payments to judge the health of a company. If a company has a history of always paying dividends, getting rid of them or lowering the amount shows the company is not doing well. If an established company such as Apple Inc. reduced dividend or removed them, it shows investors that Apple is in trouble.
Dividends are important for both the shareholder and company. It allows the company to reach out to new investors, and grow in size. The shareholders receive a reward for their investment and also use it to judge a company’s performance. If you have any further questions regarding dividends, you can talk to an investment lawyer.
Natalie Ho is a legal tech intern at Lawpath, working as part of the Content Team. She is in her 2nd year at Macquarie University studying a double degree of Science and Law and is highly passionate about the accessibility of law.