Definition
In accounting and finance, a dividend is the portion of a company’s earnings that is distributed to its shareholders. Dividends are typically expressed as an amount per share and are issued as a reward to investors who have put their money into the company’s equity. The company’s board of directors decides the size and frequency of dividend payments, which may vary based on the firm’s performance and strategic retention plans.
Examples
- Company A declares a 15% dividend on its £1 shares, resulting in a 15p payment per share. If these shares are currently trading at £5 in the market, the dividend yield would be calculated as
(15p / £5) * 100 = 3%. - Company B issues an interim dividend of $0.50 per share after its six-month financial review and follows up with a final dividend of $1.50 per share after its annual financial statements are released.
Frequently Asked Questions
What is a dividend yield?
A dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. It is calculated as (Annual Dividend per Share / Price per Share) * 100%.
How often are dividends paid?
The frequency of dividend payments can vary. In the UK, it is common for companies to distribute dividends every six months, while in the USA, dividends are typically paid quarterly.
What is the difference between final and interim dividends?
A final dividend is paid out at the end of a financial year and is announced at the company’s Annual General Meeting (AGM). In contrast, an interim dividend is paid out midway through the fiscal year and announced during the release of the interim financial statements.
Are dividends the same as interest payments?
No, dividends are distributions from a company’s profits to its shareholders. Interest payments, on the other hand, are the cost of borrowing money, usually associated with bonds or loans. However, interest payments on gilt-edged securities are sometimes colloquially referred to as dividends, despite being fixed.
What is a dividend warrant?
A dividend warrant is a document drawn on a company’s banker that authorizes the bank to pay the approved dividend to the shareholders. In the USA, the equivalent is typically a dividend check.
How is the size of a dividend determined?
The size of a dividend is determined by a company’s board of directors based on the firm’s profitability, cash flow, and strategic financial goals. The board decides how much to retain in the business for growth and how much to disperse to shareholders.
Related Terms
- Par Value: The nominal or face value of a share of stock as stated by the issuing company. Par value is largely an accounting antiquity and is less relevant in modern equity valuation.
- Dividend Yield: A metric used to measure the ratio of a company’s annual dividend compared to its share price.
- Final Dividend: The largest dividend distribution, typically announced at the AGM along with the company’s annual results.
- Interim Dividend: A smaller dividend payment made mid-way through the company’s fiscal year.
- Dividend Warrant: An instrument issued by a company to authorize the bank to pay the dividend to shareholders.
- Gilt-edged Securities: High-grade bonds issued by a government that pays a fixed interest rate, sometimes referred to as dividends.
Online Resources
Suggested Books for Further Studies
- “The Little Book of Big Dividends: A Safe Formula for Guaranteed Returns” by Charles B. Carlson
- “Dividends Still Don’t Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market” by Kelley Wright
- “Common Stocks and Uncommon Profits and Other Writings” by Philip A. Fisher
Accounting Basics: “Dividend” Fundamentals Quiz
Thank you for exploring the concept of dividends with our comprehensive breakdown and quiz. Keep enhancing your financial proficiency!
