A dividend is the distribution of reward from a portion of company’s earnings and is paid to a class of its shareholders. Dividends are decided and managed by the company’s board of directors, though they must be approved by the shareholders through their voting rights. Dividends can be issued as cash payments, as shares of stock, though cash dividends are the most common. Along with companies, various mutual funds and exchange traded funds (ETF) also pay dividends.
Basics of a Dividend
Dividend is a token reward paid to the shareholders for their investment in a company’s equity, and it usually originates from the company’s net profits. While the major portion of the profits is kept within the company as retained earnings which represent the money to be used for the company’s ongoing and future business activities, the remainder can be allocated to the shareholders as a dividend. However, at times, companies may still make dividend payments even when they don’t make suitable profits. They may do so to maintain their established track record of making regular dividend payments.
Important Dates :
Dividends are announced by company management on the announcement date, and must be approved by the shareholders before they can be paid.
The date on which the dividend eligibility expires is called the ex-dividend date or simply the ex-date. For instance, if a stock has an ex-date of Monday, May 5, then shareholders who buy the stock on or after that day will NOT qualify to get the dividend as they are buying it on or after the dividend expiry date.
The record date is the cut-off date, established by the company in order to determine which shareholders are eligible to receive a dividend or distribution.
The company issues a payment of the dividend on the payment date , which is when the money gets credited to investors’ accounts.