Definition
A dividend is the portion of a company’s earnings that is distributed to its shareholders. The amount of the dividend is typically expressed per share and based on the par value of the share. For example, a 15% dividend on a £1 share will distribute 15p per share.
Understanding Dividend Yield
While the nominal dividend rate provides a basic idea of what a shareholder will receive per share, the dividend yield is often more insightful. It measures the dividend as a percentage of the current market price of the stock, offering a clearer picture of the return on investment. For instance, if £1 shares with a 15% dividend are trading at £5, the dividend yield would be 3%.
Decision-Making and Payments
The decision on the size of the dividend payment rests with a company’s board of directors. They need to strike a balance between distributing profits to shareholders and retaining funds within the company for future growth. Dividend policies can vary widely among companies, influenced by their profitability, investment opportunities, and market conditions.
In the UK, dividends are typically paid semi-annually with the final dividend, which is generally larger, announced at the annual general meeting (AGM). An interim dividend is paid following the interim financial statement. In the U.S., dividends are usually distributed quarterly.
Special Considerations
Dividends are commonly paid via dividend warrants in the UK and dividend checks in the USA. Despite being a common practice among companies, not all dividends are cash-based; sometimes, companies issue dividends in the form of additional shares.
Though not typical, interest payments on gilt-edged securities are sometimes referred to as dividends, reflecting a fixed payment rather than a share of profits.
Related Terms
- Par Value: The face value of a stock, which is used as a basis for the dividend payment.
- Dividend Yield: A financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
- Interim Dividend: The dividend paid at the halfway point of a financial year before final year-end figures are known.
- Final Dividend: The dividend announced at a company’s AGM once annual results are finalized.
- Dividend Warrant: A certificate used primarily in the UK that authorizes the payment of a dividend.
Recommended Books
- “The Little Book of Big Dividends” by Charles B. Carlson – A guide to building wealth by investing in dividend-paying stocks.
- “Dividends Still Don’t Lie” by Kelley Wright – An update to the classic investment guide, focusing on using dividend yield to enhance stock returns.
The subtleties of dividends are not merely cents and sensibilities, they’re about dollars and sense. Understanding them can be your financial narrative’s plot twist, leading to happy returns!
