Equities Questions And Answers About Dividends. The dividend belongs to the share like the interest to the fixed deposit. Companies that have managed to pay dividends to their shareholders over decades regularly are proud of it and advertise with it. Foundations and business families depend on their annual dividends. And it is also essential for many small investors.
What is a dividend?
The dividend is the part of the profit that a stock corporation pays out to its owners – that is, to the shareholders. That is why stocks are sometimes called equity securities.
How often is the dividend paid?
Most companies pay a dividend once a year. Others distribute part of their profit over the year – for example, they pay a dividend every quarter. Finally, there are those companies that don’t pay dividends at all. This may be because they are only not making a profit to distribute. But it can also be a strategy. Such a process can be useful for several reasons. One reason: the assumption that the money generates a higher return if you leave it in the company and use it for investments. Another: possible tax advantages for shareholders.
What types of dividends are there?
It is customary to distribute profits as a cash dividend: a predetermined amount is credited to the shareholder’s account for each share.
There is also the so-called stock dividend. “Stock” is the English word for share. A stock dividend thus describes the distribution of a dividend in the form of shares. Instead of cash in the account, a shareholder has additional shares of his company in his custody account after such distribution.
It is also possible to distribute material assets. This could be, for example, shares in a subsidiary that a company wants to spin-off. The shareholders then own two separate companies. Such a dividend is also known as a dividend in kind.
Who decides on the distribution of a dividend?
The owners themselves – at the annual general meeting of their stock corporation. Before that, however, the board will make a dividend proposal. Most of the shareholders agree to this proposal. Usually, the dividend is paid out directly on the day of the general meeting.
What do I have to do to have the dividend credited to me?
Nothing. It will be automatically posted to your account. It is possible, however, that you have to apply for the cash dividend to be exchanged for a stock dividend – if your company offers this option (and you want to take advantage of it).
Because of the dividend, is it worth buying the stock the day before the distribution and then selling it straight away?
No. The stock market cannot be tricked that easily. When the dividend is distributed, the share is traded “ex-dividend”, i.e. without the amount distributed. The share price falls accordingly. That is logical; after all, the company has less capital after the distribution – it sinks in value.
But maybe it is then worth speculating that the share price will fall because of the dividend distribution?
No, it’s not worth it either. Because the providers of warrants and certificates, with which private investors can speculate on falling prices, include the dividend payments in the costs of the speculative instruments. That means: Such papers do not rise because of the dividend distribution.
What is the dividend yield?
The dividend yield is a crucial figure for assessing stocks. It is obtained by dividing the amount of the dividend per share by the share price and multiplying the result by 100.
Many investment strategies place particular emphasis on dividend yields, and several funds invest in stocks with exceptionally high dividend yields. Even so, the fact that a stock has a high dividend yield does not necessarily mean that it is an enormously profitable investment: Market participants may expect the company’s profits (and thus dividends) to be lower in the future. Or, conversely, they expect companies that have not yet paid any dividends to make exceptionally high profits in the future and pass them on to investors. So there are many reasons not to (only) rely on this metric when buying stocks or equity funds.
Can I find information about the dividend on my shares?
The dividends paid in recent years are listed in various finance portals on the Internet.
Also, estimates of future dividends are often published. The calculations are based on forecasts by stock analysts. These should be enjoyed with caution; after all, nobody knows the future – not even the best-paid experts.
What do equity funds do with the dividends that are paid to them?
Equity funds collect dividends first. You then pass them on to the shareholders. This can be done through a distribution. In this case, money flows into the accounts of the fund owners. Or it can be done through an accumulation. In this case, the fund reinvests the dividends received, and the price of an individual share increases accordingly.