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When businesses become successful, the residual effect of that is profits. Because many persons may have contributed to the success of these businesses via investments in the company (becoming shareholders), they are entitled to a proportionate share of any profits to be distributed.
The distributed profits of a company (or its’ earnings) are referred to as its dividends. Dividends are typically decided by a company’s board of directors and paid out to its shareholders.
They can be issued as cash payments, as shares of stock, or other forms of property. A company’s board can choose to issue dividends over various timeframes, and at different payout rates (i.e the amount of dividends paid out to shareholders in relation to the amount of earnings of a company).
In most instances, dividends are paid quarterly or half-yearly. Companies can also issue “special dividends” as the need arises to fit some particular business goal or to achieve some objective.
A company’s profits are an important factor in determining a dividend. Again, depending on the goal of the business, a company can decide to distribute profits to shareholders via a dividend, or it can decide to keep it within the company as retained earnings. Further, if the company is publicly traded, it may choose to use its profits to repurchase their own shares in the open market through a share buyback.
Another important concept around dividends involves the dividend yield. This is a measure that illustrates a dividend as a percent of its current share price.
As is to be expected, many startup enterprises tend to not offer dividends since they typically make losses or if they are profitable, usually reinvest the profit to help facilitate more growth and expansion. Only when businesses have become larger and more established are dividend payments usually expected since a businesses’ profitability becomes more stable and predictable.
Companies that issue regular dividends often seek to maximise shareholder wealth in ways beyond rapid growth.
Adjustments to a company’s dividend policy are often keenly observed by investors. For instance, if a company has a long history of past dividend payments decides to cut or reduce its dividend amount, this could signal to investors that the company could be in trouble.
As a result, most investors tend to place a high value on receiving dividends with the main argument being that they are less certain to receive future growth and the possible capital gains from the reinvested profit than they are of receiving current dividend payments.
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