Dividend - profits paid or given to shareholders by corporation. Dividend is variable and is paid by corporation from profit they made. In case of insolvency dividend is income obtained from sold, unsecured assets. Not all the profits are given to shareholders, corporation administration decides if dividends are given or re-invested (retained earnings).
- Dividend Yield is used to calculate expected return rate on dividends as a part of the market price of shares, usually dividend yield is about 1 - 3%.
- Dividend Pay-out Ratio is a financial indicator comparing company's dividend payments to made profits. High dividend pay-out ratio attracts potential investors, in mature companies this rate is usually between 30 - 40%.
Forms of payment
- Cash dividends - usually as a money transfer to shareholders account or a paper check. Company doesn't see them as an expense but as retained earnings, they are included in balance sheet.
- Stock dividends - additional shares given to shareholders which are increasing market capitalization and company's value. Stock dividends are improving company's financial liquidity, have the same value as cash dividends and enable shareholders to increase their shares without extra payments.
- Special Dividend - type of extra dividend paid beside normal dividends, generally an one-time payment in case if company wants to reduce high level of liquid assets. For example, Microsoft in 2004 distributes special dividends.
- Other dividends - for example property dividends distributed usually in small companies and paid in form of assets.
Dividend policy is company's general strategy for distribution of yearly income as dividends. When choosing dividends policy managers must consider their influence on share prices and financing of future projects. If company is increasing dividends their funds for new projects are decreasing. There are few types of dividend policy and some of them are:
- stable - amount of money from dividend is constant but with growth possibility,
- constant - constant part from company's yearly earning,
- residual value - distributing as a dividend everything what is left after investments,
- customer interest - depends on shareholder needs,
- lifestyle - depends on owners lifestyle (usually in small companies).
- Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. the Journal of Business, 34(4), 411-433.
Author: Monika Stempień