Dividend
Dividends can provide at least temporarily stable income and raise morale among shareholders, but are not guaranteed to continue.
For the joint-stock company, paying dividends is not an expense; rather, it is the division of after-tax profits among shareholders.
Retained earnings (profits that have not been distributed as dividends) are shown in the shareholders' equity section on the company's balance sheet – the same as its issued share capital.
[4][5] The VOC paid annual dividends worth around 18 percent of the value of the shares for almost 200 years of existence (1602–1800).
However in Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd (2013) the Supreme Court of New South Wales broke with this precedent and recognised a shareholder's contractual right to a dividend.
[7] Cash dividends are the most common form of payment and are paid out in currency, usually via electronic funds transfer or a printed paper check.
They are relatively rare and most frequently are securities of other companies owned by the issuer, however, they can take other forms, such as products and services.
Since earnings are an accountancy measure, they do not necessarily closely correspond to the actual cash flow of the company.
Hence another way to determine the safety of a dividend is to replace earnings in the payout ratio by free cash flow.
Declaration date – the day the board of directors announces its intention to pay a dividend.
Ex-dividend date – the day on which shares bought and sold no longer come attached with the right to be paid the most recently declared dividend.
This is an important date for any company that has many shareholders, including those that trade on exchanges, to enable reconciliation of who is entitled to be paid the dividend.
Some common dividend frequencies are quarterly in the US, semi-annually in Japan, UK and Australia and annually in Germany.
DRIPs allow shareholders to use dividends to systematically buy small amounts of stock, usually with no commission and sometimes at a slight discount.
Utilizing a DRIP is a powerful investment tool because it takes advantage of both dollar cost averaging and compounding.
Dollar cost averaging is the principle of investing a set amount of capital at recurring intervals.
The rules in Part 23 of the Companies Act 2006 (sections 829–853) govern the payment of dividends to shareholders.
The aim was to address concerns which had emerged where companies in financial distress were still able to distribute "significant dividends" to their shareholders.
To calculate the amount of the drop, the traditional method is to view the financial effects of the dividend from the perspective of the company.
The effect of a dividend payment on share price is an important reason why it can sometimes be desirable to exercise an American option early.
Proponents of this view (and thus critics of dividends per se) suggest that an eagerness to return profits to shareholders may indicate the management having run out of good ideas for the future of the company.
A counter-argument to this position came from Peter Lynch of Fidelity investments, who declared: "One strong argument in favor of companies that pay dividends is that companies that don’t pay dividends have a sorry history of blowing the money on a string of stupid diworseifications";[22] using his self-created term for diversification that results in worse effects, not better.
[23] Benjamin Graham and David Dodd wrote in Securities Analysis (1934): "The prime purpose of a business corporation is to pay dividends to its owners.
[28][30] Several explanations have been proposed for this outperformance such as dividends being associated with value stocks which are themselves associated with long-term outperformance;[31] being more durable in crashes or bear markets;[32][33] being associated with profitable companies exhibiting high levels of free cashflow; and being associated with mature, unfashionable companies that are overlooked by many investors and thus an effective contrarian strategy.
[34][35] Asset managers at Tweedy, Browne[36] and Capital Group[37] have suggested dividends are an effective measure of a given company's overall financial status.
Certain types of specialized investment companies (such as a REIT in the U.S.) allow the shareholder to partially or fully avoid double taxation of dividends.
This can be sustainable because the accounting earnings do not recognize any increasing value of real estate holdings and resource reserves.
This may result in capital gains which may be taxed differently from dividends representing distribution of earnings.
In the case of mutual insurance, for example, in the United States, a distribution of profits to holders of participating life policies is called a dividend.
As a contrasting example, in the United Kingdom, the surrender value of a with-profits policy is increased by a bonus, which also serves the purpose of distributing profits.
