"Companies that earn a profit can do one of three things: pay that profit out to shareholders, reinvest it in the business through expansion, debt reduction or share repurchases, or both.
When a portion of the profit is paid out to shareholders, the payment is known as a dividend.
" Not long ago, dividend was the main reason for an investor to buy shares.
One generally compared the returns that one would get on the investments in banks in fixed deposits with the rate of dividend.
The tendency was to invest in companies which paid high rates of dividends.
Now the perspective has changed.
Along with the dividend, the objective of the investor is to increase wealth.
The procedure to pay dividends is methodical.
Firstly, dividend needs to be declared, after the rate of dividend is approved by the Board of Directors of the company.
Such approval is required, each time the dividend is paid.
Sometimes a company pays dividend on more than once in a year.
Three dates related to dividend are important.
They are: The declaration date: On this date, the Board of Directors announces their inclination to pay the dividend.
In the company's books of accounts a liability is created as it now owes money to the shareholders.
Date of record: This is popularly known as the ex-dividend date.
From this day, the shareholders are entitled to claim payment of the declared dividend.
The share will be graded ex-dividend or ex-rights from the fourth business day prior to the payment date.
The owners of the shares before that date will receive the dividend.
The shares purchased after the ex-dividend rate, will not receive the dividend.
The investor from whom you purchased the share will receive the dividend payment.
Date of payment: This is the date on which the payment is actually given to the shareholder.
Preferred share holders get dividend payment, before the common shareholders are paid.
The rate of dividend on preferred shares is usually set, and the rate for the common share holders is at the sole discretion of the Board of Directors.
Are high dividends good or bad? No straightforward answer is possible to this question.
Many policy issues are involved.
The Board of Directors does different types of calculations before deciding upon the rate of dividend.
One school of thought avers that "a company should only pay dividends if it is unable to reinvest its cash at a higher rate than the shareholders (owners) of the business would be able to if the money was in their hands.
" But this thinking is strictly from the business point of view.
The company can not deny payment of dividend to any shareholder on this count.
One may require the sum for living expenses and to pay the bills.
One may not be interested in the long-term appreciation of investment.
Dividend Payout Ratio: This is the percentage of net income which is paid in the form of dividend.
This ratio has lots of importance in projecting the future prospectus of the company because its inverse, the retention ratio is the indicator of a company's growth.
Before deciding the rate of dividend, the Board of Directors is obliged to think from several angles.
Investors invariably prefer high dividend shares for obvious reasons.
A company that lowers the rate of dividend, for whatever reasons, is not likely to find favor with the investors.
The decline in the share prices is certain.
The shareholders may also shift elsewhere looking for better options.
Keeping this issue in mind, the company will not raise the rate of dividend, on the basis of successful performance in one year.
They will wait and watch for a couple of years before declaring the higher rate of dividend which they hope to maintain for ever.
If the company is facing a temporary problem, it will not lower the rate of dividend.
The rate of dividend is the first attraction to purchase a share.
Higher rates of dividend year after year tell something important about the health and growth of the company.