WHAT ARE DIVIDENDS AND DIVIDEND POLICIES ?

What is a dividend? A dividend is the distribution of corporate profits to eligible shareholders. Dividend payments and amounts are determined by a company’s board of directors and are made by publicly listed companies as a reward to investors for putting their money into the venture . What is a Dividend Policy? A company’s dividend policy dictates the amount of dividends paid out by the company to its shareholders and the frequency with which the dividends are paid out. When a company makes a profit, they need to make a decision on what to do with it. They can either retain the profits in the company (retained earnings on the balance sheet), or they can distribute the money to shareholders in the form of dividends. How do dividends work? A dividend is paid per share of stock -if you own 30 shares in a company and that company pays $2 in annual cash dividends , you will receive $60 per share. Types of Dividends Cash dividends:Companies generally pay these in cash directly into the shareholder’s brokerage account. Stock Dividends:Comapnies can also pay investors with additional shares of stock. Dividend Re-investment programs (DRIPs):Investors in DRIPs are able to reinvest any dividends received back into the company’s stock , often at a discount. Special Dividends:These dividends payout on all shares of a company’s common stock , but don’t recur like regular dividends .A company often issues a special dividend to distribute profits that have accumulated over several years and for which it has no immediate need. Preferred Dividends : It is a type of stock that functions less like a stock and more like a bond . Dividends are usually paid quarterly , but unlike dividends on common stock, dividends on preferred stocks are fixed. THERE ARE VARIOUS DIVIDEND POLICY TYPES AS SHOWN BELOW 1. Regular dividend policy 2. Stable dividend policy 3. Irregular dividend policy 4. No dividend policy These dividend policies can be understood as: 1. Regular dividend policy Under the regular dividend policy, the company pays out dividends to its shareholders every year. If the company makes abnormal profits (very high profits), the excess profits will not be distributed to the shareholders but are withheld by the company as retained earnings. If the company makes a loss, the shareholders will still be paid a dividend under the policy. 2. Stable dividend policy Under the stable dividend policy, the percentage of profits paid out as dividends is fixed.Investing in a company that follows such a policy is risky for investors as the amount of dividends fluctuates with the level of profits. 3. Irregular dividend policy Under the irregular dividend policy,if the company make an abnormal profit in a certain year, the BODs can decide to distribute it to the shareholders or not pay out any dividends at all and instead keep the profits for business expansion and future projects. 4. No dividend policy Under the no dividend policy, the company doesn’t distribute dividends to shareholders. It is because any profits earned is retained and reinvested into the business for future growth. Shareholders invest in them because the value of the company stock appreciates. For the investor, the share price appreciation is more valuable than a dividend payout.