What is a Dividend?
A dividend is a share of profits and Retained Earnings. The Retained Earnings formula represents all accumulated net income netted by all dividends paid to shareholders. Retained Earnings are part that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. The annual dividend per share divided by the share price is the dividend yield Dividend Yield FormulaThe Dividend Yield is a financial ratio that measures the annual value of dividends received relative to the market value per share of a security. It calculates the percentage of a company’s market price of a share that is paid to shareholders in the form of dividends..
How a dividend works
A dividend’s value is determined on a per-share basis and is to be paid equally to all shareholders of the same class (common, preferred, etc.). The payment must be approved by the Board of Directors.
When a dividend is declared, it will then be paid on a certain date, known as the payable date.
Steps of how it works:
- The company generates profitsNet IncomeNet Income is a key line item, not only in the income statement, but in all three core financial statements. While it is arrived at through and retained earnings
- The management team decides some excess profits should be paid out to shareholders (instead of being reinvested)
- The board approves the planned dividend
- The company announces the dividend (the value per share, the date when it will be paid, the record date, etc.)
- The dividend is paid to shareholders
Types of dividends
There are various types of dividends a company can pay to its shareholders. Below is a list and a brief description of the most common types that shareholders receive.
Types include:
- Cash – this is the payment of actual cash from the company directly to the shareholders and is the most common type of payment. The payment is usually made electronically (wire transfer), but may also be paid by check or cash.
- Stock – stock dividends are paid out to shareholders by issuing new shares in the company. These are paid out pro-rata,ProratedIn accounting and finance, prorated means adjusted for a specific time period.
- Assets – a company is not limited to paying distributions to its shareholders in the form of cash or shares. A company may also pay out other assets such as investment securities, physical assets, and real estate, although this is not a common practice.
- Special – a special dividend is one that’s paid outside of a company’s regular policy (i.e., quarterly, annual, etc.). It is usually the result of having excess cash on hand for one reason or another.
- Common – this refers to the class of shareholders (i.e., common shareholders), not what’s actually being received as payment.
- Preferred – this also refers to the class of shareholders receiving the payment.
- Other – other, less common, types of financial assets can be paid out as dividends, such as options, warrants, shares in a new spin-out company, etc.