Importance of Dividends.Dividends are payments made by a company to its shareholders. When a company makes a profit, that money can be used for two uses: 1. It can be reinvested in the business (called retained earnings), or 2. It can be paid to the company’s shareholders as a “dividend”. The payment of dividends is not an expense, rather it is the division of an asset among the shareholders. The most common is that many companies retain a part of their income and pay the rest as dividends. Listed companies often pay dividends according to a fixed schedule, but can declare an extraordinary dividend payment at any time, sometimes called a special dividend to distinguish it from a normal one.
Overview
The profits of a company can be reinvested in the business itself, or paid to its shareholders as dividends. The frequency of these payments can vary based on many variables. In the United States, dividends from publicly traded companies are typically declared quarterly by the board of directors. In other countries dividends are paid every two years; as an interim dividend shortly after the company announces its interim results and a final general dividend after its annual general meeting. In other countries, the board of directors will propose the payment of a dividend to shareholders at the annual meeting that will proceed to vote.
In the United States, a decision on the amount and frequency of dividends is reserved to the discretion of the board of directors. Shareholders are explicitly inhibited from introducing resolutions involving specific amounts of dividends (SEC Form 8-A [3])
When a company incurs losses during a year, it can choose to continue paying dividends from the retained earnings obtained in previous years, or to suspend those payments. When a company receives a non-recurring profit, for example, from the sale of some assets, and has no plans to reinvest the income, the money is often returned to shareholders in the form of a special dividend. This type of dividend is often larger than usual and occurs outside of the normal dividend distribution schedule.
Dates
Dividends must be “declared” (approved) by a company’s Board of Directors each time they are paid. There are four important dates to remember regarding dividends. These are discussed in detail with examples on the SEC ( Securities and Exchange Commission) site.
Declaration date –
The declaration date (“Declaration Date”) is the day on which the Board of Directors or the Board of Directors announces its intention to pay a dividend. On this day, a liability is created that becomes part of the company’s records in its accounting books, now that money is owed to the shareholders. On the declaration date, the Board will also announce a registration date and a payment date.
Ex-dividend date
The “ex-dividend” date refers to the day from which all shares bought and sold are no longer attached with the right to obtain the most recently declared dividend payment. Before this date, the share is said to “come with dividends”: current holders and anyone who buys the share will receive the dividend, while all holders by selling the shares before this date lose their right to the dividend. On and from this date, the share becomes an “ex – dividend”: current shareholders will receive the dividend even if they now decide to sell the shares, while now anyone who buys the share will not receive the dividend.
It is relatively common for the price of a stock to drop on the “ex-dividend” date by an amount roughly equal to the dividend paid. This reflects the decrease in the assets of the company resulting from the declaration of dividend payment to shareholders. The company does not take any explicit action to adjust the price of the shares in the market, in an efficient market, buyers and sellers will adjust the price automatically.
Record date
Shareholders who duly register their holding on or before the Record date will receive the dividend. Shareholders who are not registered on this date will not receive the dividend. Registration in most countries is essentially automatic for shares acquired before the ex-dividend date.
// Payment date
The payment date is the day when the dividend will be credited to the broker’s account where you have the holding.
