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KEY TAKEAWAYS
What Is A Dividend?
Understanding Dividends
Dividends must be approved by the shareholders through their voting rights. Although
cash dividends are the most common, dividends can also be issued as shares of stock
or other property. Along with companies, various mutual funds and exchange-traded
funds (ETFs) also pay dividends.
The board of directors can choose to issue dividends over various time frames and with
different payout rates. Dividends can be paid at a scheduled frequency, such as
monthly, quarterly, or annually. For example, Walmart Inc. (WMT) and Unilever (UL)
make regular quarterly dividend payments. 12
Companies can also issue non-recurring special dividends, either individually or in
addition to a scheduled dividend. Backed by strong business performance and an
improved financial outlook, Microsoft Corp. (MSFT) declared a special dividend of
$3.00 per share in 2004, which was way above the usual quarterly dividends in the
range of $0.04 to $0.08 per share.3
Dividend-Paying Companies
Larger, more established companies with more predictable profits are often the best
dividend payers. These companies tend to issue regular dividends because they seek
to maximize shareholder wealth in ways aside from normal growth. Companies in the
following industry sectors are observed to be maintaining a regular record of dividend
payments:
Basic materials
Oil and gas
Banks and financial
Healthcare and pharmaceuticals
Utilities
Startups and other high-growth companies, such as those in the technology or biotech
sectors, may not offer regular dividends. Because these companies may be in the early
stages of development and may incur high costs (as well as losses) attributed to
research and development, business expansion, and operational activities, they may
not have sufficient funds to issue dividends.
For example, a company that is trading at $60 per share declares a $2 dividend on the
announcement date. As soon as the news becomes public, the share price shoots up
by around $2 and hits $62. Say the stock trades at $63 one business day prior to the
ex-dividend date. On the ex-dividend date, it's adjusted by $2 and begins trading at $61
at the start of the trading session on the ex-dividend date, because anyone buying on
the ex-dividend date will not receive the dividend.
Keep in mind that this may or may not happen, but the price should adjust, lowering the
share price by the dividend on the ex-dividend date.
A high-value dividend declaration can indicate that the company is doing well and has
generated good profits. But it can also indicate that the company does not have
suitable projects to generate better returns in the future. Therefore, it is utilizing its cash
to pay shareholders instead of reinvesting it into growth.
A stock-investing fund may also pay dividends. Its dividends may come from the
dividend(s) it receives from the stocks held in its portfolio, or by selling a certain
quantity of stocks. It's likely the investors receiving the dividend from the fund are
reducing their holding value, which gets reflected in the reduced NAV on the ex-
dividend date.
For instance, in the case of low payments, they can instead sell some shares to get the
necessary cash they need. In either case, the combination of the value of an
investment in the company and the cash they hold will remain the same. Miller and
Modigliani thus conclude that dividends are irrelevant, and investors shouldn’t care
about the firm's dividend policy since they can create their own synthetically. 8
Dividends can help to offset costs from your broker and your taxes. Ultimately, this can
make dividend investments more attractive. Of course, to get invested in dividend-
earning assets, one would need a stockbroker.
Tax is another important consideration when investing for dividend gains. Investors in
high tax brackets are observed to prefer dividend-paying stocks if the jurisdiction allows
zero or comparatively lower tax on dividends than the normal rates. For example,
Greece and Slovakia have a lower tax on dividend income for shareholders, while
dividend gains are tax-exempt in Hong Kong. 910
What Is a Dividend?
A dividend is a distribution of cash or stock to a class of shareholders in a company. Typically,
dividends are drawn from a company’s retained earnings; however, issuing dividends with negative
retained income is still possible, but less common. Dividends carry important dates, which
determine whether or not shareholders will receive dividend payout.
First, the ex-dividend date is the last date that eligibility to receive the dividend expires; most often,
it occurs one business day before the record date. Second, the record date is when the board of
directors determines which shareholders will receive dividends, along with relevant financial
information related to the dividend payout.