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Investment Dictionary


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Dividends

 

Dividends are capital payments from companies to theirs shareholders. Normally dividends are paid by cash and usually but necessary once a year. Every company’s common share of the same class gets equal dividend at the time. The amount of the dividend payment is decided by management board and confirmed by shareholders meeting.

 

Usually dividends are paid out when company has free cash or wants to achieve effective capital structure using a debt and doesn’t have better opportunities to invest. Larger companies have dividend policy and try to follow it. Theoretically dividends should be paid out if company cannot achieve better return from investment into activity than shareholders expected return from stock. 

 

Dividend paying stocks are popular at value investing and are more stable than growth stocks. Usually stocks with high dividend yield are stocks of companies that works in a stable segment and have a steady cash flow. 

 

If company doesn’t pay dividends it doesn’t mean that is a bad investment. Might be that company is fast growing or has growth plans and believes can invest free cash better than paid it out to the shareholders. Even if company has free cash to pay out it can prefer stock buybacks rather than dividends if it’s more tax friendly (it depends on country tax system).  






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