SHARES AND DIVIDENDS
What is a dividend?
Shareholders in a company are
usually entitled to a payment of
cash from its profits. The company
pays a dividend sum on every share
it has issued, but it is up to the
company’s board to decide how
much profit to reinvest and pay out.
Investors may look at a company’s
rate of dividend payout, along with
its capital growth, to gauge its
financial health and decide whether
to invest in it. Investors who rely
on shares for income are likely to
invest in companies that reliably
pay out dividends. In a good
economic climate, they win
twice—the dividend provides
income and the capital value of the
shareholding increases. However,
there is always a risk that the
value of shares will go down,
and companies only pay dividends
if they have made a profit.
Paying dividends is a good way
for a company to attract investors.
It is essentially a reward for putting
money into a company so that it
can fund its existing output and
develop and expand the business.
Announcing retained profits
At the end of the financial year, the company
announces its retained profits: the sum it intends
to keep for reinvesting or paying off debts rather
than pay out as dividends.
Making the decision for dividends
The board of directors makes a decision on
whether there is enough to warrant a dividend
payment, and if so, how much. It records details
of each payment in dividend vouchers.
Dividend yield ratio Measure
of how much a company pays out
in dividends relative to the price
of each share
Dividend per share Sum paid
on each share after retained
profits have been calculated
Dividend payout ratio
Percentage of a company’s net
income that is paid out in the
form of dividends
NEED TO KNOW
How it works
Shareholders usually receive a dividend if the company in which they hold
shares has retained enough profit in that financial year to make the payment.
The decision to make a payment is made by the board of directors. The dividend
might be paid every quarter (four times a year), or in two parts—an interim
dividend may be made partway through the year, with the final dividend paid
just after the end of the financial year.
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how finance works
Raising financing
1602
the year the Dutch East
India Company became
the first company to
issue stocks and bonds
When interest rates are low, shares with high dividend
payouts become extremely attractive to investors
because they provide a better return than investments
that yield an interest payment. This economic climate
encourages companies to pay out top-rate dividends
and so attract as many investors as possible, which in
turn increases the share value.
Conversely, when interest rates are rising, investors
may prefer to put their money into fixed-income
assets, which will pay high rates as a result of the hike
without the risk attached to buying shares.
INTEREST RATES AND DIVIDENDS
Making the payment
Most dividends are cash dividends. Sometimes
companies distribute stock dividends, issuing
more shares instead of cash to shareholders.
Paying taxes
Shareholders must
declare dividends on
their tax return and
pay taxes on them.
Keeping funds for growth
The company keeps some of its profit to put back into
the business. It needs to strike a balance between
pleasing investors and expanding its operation.
Investors are
attracted to
pay into
fixed-income
assets, such as
deposit accounts.
Investors are
attracted to
buy shares as
dividends give
a good return
for their money.
HIGH
INTEREST
RATES
LOW
INTEREST
RATES
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