A dividend refers to a payment, which a company pays to its shareholders. Payment of dividends is not an expense for a company; it is a distribution of assets among the shareholders.
When a company earns a profit, it has two options for implementing it. They are the following:
Re-investment of the profit into business operations, which is also known as retained earnings
Paying dividends to the shareholders of the company
A large number of companies keep aside a part of the profits earned by them, the remainder distributed as dividends. They are dispersed in cash, most commonly, or in the form of stocks and shares.
Dividends come in multiple forms:
Cash
Property
Stock
Other forms
Normally, public companies make the payment of dividends on a specified schedule. Nevertheless, they have the discretion to declare a dividend at any point in time, hence, the special dividend.
In the U.S., companies normally declare dividends on a quarterly basis. In other countries, they declare dividends on a yearly or half-yearly basis in the form of a final or an interim dividend.
The board of directors of a company has to declare a dividend. The associated dates are the following:
- Ex-dividend date
- Declaration date
- Record date
- Payment date
If a company has suffered a loss, it still has the option to pay dividends out of retained earnings made during earlier years or cancel the dividend.
Some companies implement dividend re-investment plans (DRIPs) for using cash dividends to buy bonus shares or stocks for the shareholders.
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