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Dividend is a method/tool by which the owners of company share the profits with the stockholders of the company. Stock holders are people who have invested in that company and are partial owners of the company. Amount of dividend to be distributed is decided by the board of directors of a company and before giving out dividend the company might keep aside certain amount of profits needed for expansion or Research or re-investing. It is purely on discretion of the board of directors whether they want to distribute dividend or not.
Dividend is often calculated in unit called Dividend Rate. which is quoted in INR each share receives. Dividend Rate might also be quoted in terms of a percent of the current market price, often called as dividend yield. Dividend payments must be approved by the shareholders and may be structured as a one-time special dividend, or as an ongoing cash flow to owners and investors. Dividends are mainly given by blue-chip companies as they have ample cash surplus and strong customer base and reputation. A newly listed company might not give dividend as it needs money for expansion and acquisitions. However ones such company reaches a mature level and becomes stable, then it might offer dividends.
A company which decides to pay-out dividend may have different principles and methods for deciding the amount of dividend per share it wants to distribute. Some of the methods which are quite common with the board of directors are as follows:
1. Stable dividend policy: Even if corporate earnings are in flux, stable dividend policy focuses on maintaining a steady dividend payout.
2. Residual dividend model: Dividends are based on earnings less funds the firm retains to finance the equity portion of its capital budget and any residual profits are then paid out to shareholders.
3. Constant payout ratio: A company pays out a specific percentage of its earnings each year as dividends, and the amount of those dividends therefore vary directly with earnings.
4. Target payout ratio: A stable dividend policy could target a long-run dividend-to-earnings ratio. The goal is to pay a stated percentage of earnings, but the share payout is given in a nominal dollar amount that adjusts to its target at the earnings baseline changes.
We'll end this post here as it has lots of concepts and methods for understanding the way dividends work and how companies decide for dividend payout. More data would make this even more heavier. You can subscribe through email to get stock investing tutorials directly in email or can press LIKE on top of the post to get updates from our facebook page.
Be tuned for our next post on Dividend yield.
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