Dividends (from Latin: dividendum – to be divided) are the profits of a joint-stock company or business entity that are distributed among shareholders or holders of securities according to their share of ownership.
The amount to be distributed is calculated after paying taxes, replenishing insurance and other reserves, and contributions to funds, among others.
In other words, dividend is a monetary sum received for an investment in a company’s development, expressed in the form of shares of the company (cash dividend). Rarely, dividends are paid in the form of company property or shares.
Dividends can be received both on common and preferred shares.
Contents
- How are dividends calculated?
- Why do companies pay dividends?
- How are dividends paid?
- How large is the profit from dividends?
- Why do dividends matter to shareholders?
- Conclusion
How are dividends calculated?
A joint-stock company (enterprise) earns profit throughout the year. Then, the shareholders’ meeting decides what percentage of the profit will be allocated for dividends (distributed among shareholders). It is from these funds that dividends are paid. It should be noted that the company is not obligated to make payments every year. The decision to pay must be made by the general meeting of shareholders. Often, the meeting decides that it is more beneficial to invest money in the company’s further development in the hope of future income.
Exceptions include preferred shares, where dividends are paid regardless (unless the company goes bankrupt).
Why do companies pay dividends?
Companies pay dividends for several main reasons:
- Dividends represent a way to reward shareholders for their invested capital in the company. This means that investors receive a portion of the company’s profit through dividend payments.
- Regular payments can help build trust among shareholders.
- Investors seeking a stable source of income may prefer stocks of a company that pays dividends.
- When investors receive dividends, they may feel more confident and less prone to panic during temporary price drops in stock values.
- Some companies may use dividends as a way to attract capital for financing their growth and development.
- For some investors, dividends are part of their investment strategy. They may choose companies that pay dividends to ensure a steady income.
How are dividends paid?
The process of payment and the amount of dividends are determined by the general meeting of shareholders. The size of dividends directly depends on the company’s performance, net profit after all taxes have been paid, and reflected in the annual financial statements.
According to Russian legislation, dividends can be paid mid-year based on quarterly, six-month, or nine-month results. However, this practice is rare in practice. Instead, shareholders often refuse to distribute profits at the meeting, forming special funds or reinvesting profits for further operations to increase competitiveness.
Dividends can be paid once a year or more frequently, referred to as interim or final (i.e., annual). Some companies consistently pay dividends year after year.
How large is the profit from dividends?
Currently, in Russia, dividend yield (i.e., the ratio of received income to the stock price) averages around 7%. Compared to foreign figures (where there are companies with very high dividend yields), this is extremely low. Therefore, in Russia, speculation on stock prices is almost the only way to make money from stocks.
Nevertheless, preferred shares of some companies in Russia can also generate a decent income.
Why do dividends matter to shareholders?
The importance of dividends for shareholders cannot be underestimated, as they play a significant role in investment decisions and provide various financial and psychological benefits to investors. Many believe that they are only useful for generating additional profit. However, here are some key aspects that demonstrate the value of dividends for shareholders:
- Dividends can encourage long-term investing. Investors who receive such payments are often less inclined towards short-term speculation and more focused on holding company stocks in their portfolio.
- They allow shareholders to directly participate in the company’s success. When the company is profitable, shareholders are rewarded for the growth and profitability of the business.
- Increasing ownership in the company. Dividends can be reinvested to purchase additional shares of the company.
- Reducing risk. Regular dividend payments can mitigate the impact of market volatility on the investor’s portfolio. Dividends provide a return even during periods of falling stock prices.
- Supporting a long-term investment strategy. Investors focused on long-term investing often prefer companies with a good history of dividend payments, as this aligns with their capital accumulation strategy.
- Evaluating the health of the company. The level and stability of payments can serve as an indicator of the company’s health and sustainability. Such companies are often seen as financially stable and reliable.
- Diversifying income. Receiving dividends can help investors diversify their sources of income, which can be beneficial during periods of economic instability.
Conclusion
Dividends hold significant importance for both companies and shareholders and play a key role in the dynamics of financial markets and investment decisions.
Despite this, it should be noted that paying dividends is not always a priority strategy for every company, and its decision may depend on specific financial conditions, goals, and business strategies. Investors should also consider that this is just one factor when making investment decisions, and they should take into account other aspects such as capital growth, the company’s financial health, and market trends.
In summary, dividends remain an important tool for meeting the financial needs of both companies and investors, and their significance will continue to play a substantial role in the world of investments and corporate finance.
FAQ
What are dividends?
Dividends are profits of a company distributed to shareholders, typically in cash or other forms.
Why do companies pay dividends?
Companies pay dividends to reward shareholders, build trust, and attract investment.
Can dividends be reinvested?
Yes, dividends can be reinvested to purchase additional shares, increasing ownership in the company.
