What is a Dividend?
Keith Mullin
35 years: Capital markets editorial
Investors buy shares in a company for two principal reasons: generating investment returns as shares rise in price, and receiving dividends. Keith briefly explains what dividends are, what considerations companies have when it comes to issuing dividends and how dividends impact share price.
Investors buy shares in a company for two principal reasons: generating investment returns as shares rise in price, and receiving dividends. Keith briefly explains what dividends are, what considerations companies have when it comes to issuing dividends and how dividends impact share price.
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What is a Dividend?
6 mins 19 secs
This is essentially when a company rewards its shareholders by paying out cash every year. It is generally paid out of a company’s annual profits or retained earnings.
Key learning objectives:
Define Dividend and Scrip Dividend
Discuss the potential reasons to not pay out dividends
Identify when investors are eligible for dividends, and when they may invest in equity
How to calculate Dividend Yield
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What is a Dividend?
This is cash paid out to equity holders, from cash in the company, after all regulatory and accounting deductions.
What are the reasons for investing in equity?
- Capital appreciation
- To receive dividends
What are the reasons to not pay out a dividend?
They may want to keep cash on their balance sheet to:
- Protect against a rainy day
- Build a war chest to help finance takeovers
- Invest in Plant expansions and R&D
- Increase capacity utilisation to boost potential future profits
What is a Scrip Dividend?
Dividends paid out in additional shares rather than in cash.
When are investors eligible for a dividend?
Once a company proposes a new dividend, new investors will have a set period of time during which they can buy the shares and receive the payout.
If they buy shares in time to receive the dividend, the shares are said to have been bought ‘cum dividend.’ Once the registration deadline passes, the ‘ex-dividend’ date is reached, and shares are not eligible.
How do we calculate the Dividend yield?
Dividend yield =Annual dividend/Share price
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