Dividend, also known as share interest, refers to the income distributed to shareholders by a corporation from its after-tax profits, which are derived from the withdrawal of reserves and surplus funds.
The dividend yield represents the dividend per share expressed as a percentage of the share’s current market price, such as 3%.
The board of directors of a corporation can choose to distribute dividends at different rates over varying periods of time. Dividends can be paid at predetermined frequencies, such as monthly, quarterly, or annually. For example, Walmart (WMT) pays dividends on a quarterly basis.
Here’s a simple way to understand it: Just like a bank pays interest in deposits, dividends are the rewards that a company gives to shareholders for owning their shares.
Let’s consider an example:
Suppose a company’s board of directors decides to distribute a dividend of 5% per share annually, and the share is valued at $100. In this case, the dividend would be $5 per share.
If dividends are paid quarterly, each distribution would amount to $1.25. The $1.25 received represents the reward the company gives you for owning their share.
Dividend announcements are quite common and can be found on the company’s website, share market software, and financial news sources.
There are two points to note regarding dividends:
1. Dividends can be paid in two forms: share dividends and cash dividends.
Share dividends refer to when a corporation issues new shares to shareholders free of charge, usually in proportion to their existing holdings.
For example, if you own 100 shares and there’s a 5% share dividend, it means you’ll receive an additional 5 shares, resulting in a total of 105 shares.
Cash dividends involve the corporation paying shareholders in cash, which is the most common and basic form of dividends.
For instance, if a person owns 100 shares and the cash dividend is $0.50 per share, the share holder will receive an additional $50.
2. Dividend payment dates:
Specific dates are associated with dividend distributions, and these dates are crucial in determining which shareholders are eligible to receive dividends. The following are important dividend dates for investors to note:
Declaration date:
The dividend is announced by the company’s management on this date and requires shareholder approval before being distributed.
Ex-dividend date:
This is the date when the dividend eligibility expires. For example, if a share has an ex-dividend date of January 9, shareholders who purchase the share on or after that date will not be eligible for the dividend.
Shareholders who own the company’s share before the ex-dividend date (January 6) are eligible for distribution.
Record date:
The record date is the cutoff date determined by the company to determine which shareholders are eligible to receive the dividend or distribution.
Payment date:
This is the date when the company disburses the dividend, which is the time when funds are credited to the investors’ accounts.
