Understanding Dividends
Long known as one of the chief ways companies can give back to investors, a dividend is a payment in cash or stock that a public or private company distributes to its shareholders.
Not all companies offer dividends, but those that do distribute them on a monthly, quarterly or annual basis. Special dividends are paid on an irregular basis.
Another way to think of a dividend is as a token reward paid to the shareholders for their investment in a company’s equity which originates from the company's net profits.
Who Receives Dividends
When a company pays a dividend, each share of stock owned at a set date, the ex-dividend date, entitles a shareholder to a set dividend payment.
However, not all shareholders are eligible to receive dividends equally.
Preferred and common stock each earn varying types of dividends, with preferred stock generally having a stronger claim to dividends than common stock.
Why Do Companies Pay Dividends?
Companies often pay dividends because many investors prefer to buy dividend stocks due to the steady cash returns they provide.
Those with a long history of regular dividend increases are particularly prized.
While many companies return capital to shareholders through repurchase programs, those can often be stopped and started with little notice to shareholders.
While dividends aren't guaranteed, companies with dividend programs tend to see them as an important part of the company's relationship with shareholders and typically make efforts to keep making those payments.
This means a dividend increase can be seen as a signal that a company's management believes it will be able to keep making payments at that level for the foreseeable future.
Dividends can be expected by the shareholders as a reward for their trust in a company and as a sign that the company's balance sheet is healthy.
Special Dividends
Although dividends are usually paid on a set basis, dividends can also be issued as a one-time bonus payment. These payouts are known as special dividends.
Companies usually announce special dividends when they’ve had an especially profitable quarter, or other windfall, and want to reward shareholders.
Stock Dividends
A stock dividend is a type of dividend where investors are paid in shares of stock instead of cash.
Investors can either sell these dividend shares for an immediate payoff or hold them for the long-term.
Which Companies Pay Dividends?
While companies of all sizes can pay dividends, stocks that commonly pay dividends are typically larger, more established companies with profits that remain consistent through each quarter, and who don't need to reinvest all their profits.
Dividends are also more common in certain industries, such as utilities, telecommunications, oil & gas, banks, healthcare, and pharmaceuticals.
Additionally, for a real estate investment trust (REIT), 90% of the taxable income these companies earn each year must be paid out in the form of dividends, and 20% of those dividends must be paid as cash in order to keep their REIT status.
