What is a dividend?

    dividend is a payment made by a company to its shareholders from its profits. It is a common way of rewarding those who have invested in the company through buying equity.

    Most financially stable companies in profit pay dividends annually, occasionally more frequently, e.g. quarterly.

    How much dividend is paid out depends on a number of factors. Even in a year of high profits, the dividend may be small or even non-existent if the company needs to retain capital for investment. If the company has experienced heavy losses, no dividend is usually paid.

    A company experiencing rapid growth is most likely to retain any profits so it can keep investing in its expansion. It is this unlikely to pay shareholders a dividend.

    Dividends are not necessarily paid out in cash. It is not unusual to reward shareholders with additional shares — this may happen when a company engages in a share buyback to a greater proportion of the company out of public ownership.

    Who is eligible for a dividend?

    The amount of dividend to be distributed is usually decided by the company’s board of directors. Not all shareholders will receive a dividend.

    Holders of preference/preferred shares receive a fixed dividend. This is in compensation for the fact that they do not usually have voting rights, unless the payment of dividends runs into arrears.

    Holders of ordinary shares may or may not receive a dividend depending on how well the company is doing. The size of dividend they receive will also vary according to the company’s performance. Ordinary shareholders do however have voting rights – typically one share per vote.

    The role of dividends in investment strategies

    Dividends are important for investors particularly when a company’s share price sees little movement on the markets, meaning any attempt to sell the shares would yield little profit.

    Some investment strategies will generally prefer stocks of companies that usually pay higher dividends. They will either reinvest the dividends into the same stock or use it on other parts of their portfolio.

    Investment strategies that do not prefer stocks of companies that pay dividends usually hope for an increase in the share price. This increase in the share price can be partly fuelled by company growth that is made possible by investing profits rather than paying them out as dividends to shareholders.

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    Dividends at mutual funds

    Investors in mutual funds, where the investors are all members of the fund and share equally both risks and rewards, also pay out dividends on income and capital gains, as well as on any interest earned. Under the terms of the mutual fund, these payouts are usually mandatory and are usually paid annually.

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