What Is a Dividend
A dividend is a part of the profit of a joint-stock company or other business entity, which is distributed among shareholders and participants. The size and procedure for paying dividends are determined by the meeting of shareholders, participants, and the regulations of the company.
Dividends may be paid several times a year, or may not be paid at all. The payment of dividends reduces capitalization and requires savings that are not allowed for reinvestment or withdrawn from it. Dividends paid before the end of the fiscal year are called interim dividends. At the end of the financial year, final dividends are paid.
Dividends are usually paid in cash. Such dividends are called cash dividends. In addition, dividends can be paid in stocks or other property of a joint-stock company.
A commercial enterprise that was created with the involvement of investments of individuals or legal entities and that receives income in the course of business should distribute a part of this income among these persons. Such payments are called dividends.
If the company incurred a loss, then the investors should not count on a dividend bonus. But there are exceptions: sometimes the top management of a company may decide to pay dividends from retained earnings of previous years or even from borrowings.
The term "dividend" is applicable to payments to shareholders, because the limited liability companies do not pay dividends, but distribute profits. Otherwise, the approach is almost the same - dividends are understood as any income received by members of the company or shareholders. In an LLC, the profit is divided proportionally to shares in the authorized capital, in a joint-stock company - according to the number and type of shares owned by shareholders.
There are the following ways to buy shares in a company and receive dividends:
- Directly from this company - as a rule, startups sell their shares independently.
- From another person.
- In a bank - as a rule, banks sell both the shares of partner companies and their own shares.
- On a stock exchange via a broker.
- Via a trading platform such as Monfex.com
Types of Dividends
Dividends can be classified as follows.
According to the form of payment, there are monetary, non-monetary, and mixed dividends. Monetary dividends are paid in cash. The non-monetary ones offer many options, such as:
- company stocks,
- other company securities or corporate rights,
- securities of other companies,
- natural goods issued or purchased by the joint-stock company itself,
- discounts on products or services.
Mixed dividends include various combinations of monetary and non-monetary dividends.
By regularity of payments, the dividends are:
- Regular - quarterly (intermediate) and annual.
- Extra or special - accrued if the company received an unplanned profit.
- Liquidation - apply in the case of bankruptcy or liquidation of the company.
Terms of Payment for Dividends
Not all net profit can be paid to shareholders or equity holders in the form of dividends. Several conditions must be observed:
- Authorized capital must be paid.
- Upon the dismissal of the company co-owner, they should receive their authorized capital share.
- The net profit should exceed the authorized capital.
- The company has no signs of bankruptcy (inability to fulfill its debt obligations), including those after the payment of dividends.
Except for the dividend definition, check out other financial definitions in the Monfex.com dictionary.
What Is a Dividend Yield
The dividend yield of shares (DY) shows the amount of cash flow that is returned to the investor in the form of dividends from each dollar invested in them.
The DY ratio per share is defined as the ratio of the annual dividend to the current share price, converted to percentage:
DY = (DPS / P) x 100%, where
- DY - dividend yield of a share
- DPS - annual dividend per share
- P - current stock price
As for the value of DPS (dividend per share) - the amount of dividends attributable to each share of the company - then there is also a formula for its calculation:
DPS = (NP / NOS) * DPR, where
- NP – the net profit of the issuer of shares (net profit)
- NOS - the number of outstanding shares of the company (number of shares)
- DPR - dividend payout ratio
The DY ratio is used for comparative evaluation of shares of various companies for maximum dividend income. As this ratio depends on the stock price, its calculation for the compared stocks must be carried out at the same time.
When analyzing the DY ratio, it is necessary to check the DPR ratio, which shows the portion of the profits allocated by the company to pay dividends.
The DPR ratio of over 50% indicates that the company spends most of its profit on dividend payments and this is very beneficial for the investor. But the higher this ratio, the more likely it is to make a decision on reducing the dividend payable. If the DPR indicator exceeds the value of 100%, the payment of dividends is at a loss to the company and there is a high probability of their cancellation.
To evaluate the future stock returns, you can analyze the data on previously paid dividends and transfer it to future time periods. To do this, use the indicator of forward yield. It is calculated based on the actual amount of payments for the previous year or multiplied by four amounts for the last quarter. This amount is divided by the current stock price. The forward yield allows you to understand the efficiency of investments over the subsequent periods of time.
It is convenient to track the dynamics of changes in returns by comparing forward returns with returns of the previous period. The returns of the previous period should be calculated on the basis of actually paid dividends and the share price in the past period.
Now you are aware of what is a dividend and what is a dividend yield. For more definitions of financial terms, refer to Monfex.com.