Dividends are a return to shareholders of a part of the company’s income, the decision of which is taken by the board of directors. Their payment can be carried out by money, shares or other assets. The size of dividends is expressed in dollars per share or as a percentage of current market value – the so-called dividend yield.
For the Earned Money
Earned money can be returned to shareholders in the form of dividends or left in the company as retained earnings. In addition, the received profit can be used for buyback of shares in open markets. However, it is the capital dividend Election that matters a lot.
Dividends and ransoms do not change the fundamental value of securities. Shareholders must approve the amount of dividends, and their payment can be in the form of a one-time special payment or shares for some time. Investors of mutual investment funds and exchange funds also receive dividends. To the investors of the mutual fund they pay the received interest income and dividends from the companies. In addition, at the end of the year, the capital gains realized as a result of investment activities (distribution of capital gains) are usually distributed. The dividend discount model (the Gordon model) uses the estimated future dividends in valuing shares.
Which companies pay dividends?
Start-ups and other fast-growing companies, for example, from the technological and biotech sectors, rarely pay dividends – all their profits are reinvested in the growth and development of the business. Large, well-known companies, as a rule, regularly pay dividends to contribute to the well-being of shareholders. Historically, the highest dividends are offered to companies in the oil and gas industry, banks, financial institutions, representatives of the healthcare and utilities sectors, investment real estate trusts.
Pros of dividends
Remembering the proverb about the bird in the hands and the crane in the sky, many experts argue that investors prefer current dividend payments to less certain results from reinvesting undistributed profits. In other words, each dividend received by investors means more to them than the dollar received as a result of a possible increase in capital (although in theory they are equivalent). In many countries, the income from dividends is taxed at a lower tax rate than the rest of the income. Therefore, some investors, seeking to save on taxes, prefer shares with high dividend yield. It is clear that such securities are most in demand from those entering the tax categories with high rates.
If a company has a long history of dividend payments, a reduction in their size or refusal to pay off signals investors about a possible disaster. On the other hand, an unexpected increase in dividends can be seen as a positive signal to the market.