In the world of business, billions of pounds worth of dividends are being paid out to investors every single year. Considering that they are responsible for circulating such vast amounts of wealth all over the globe, it is worthwhile outlining exactly what a dividend is.
What is a Dividend?
A dividend is a sum that is annually paid out to the shareholders of a company. The payments – which usually take the form of cash – are determined by a company’s directors. They take into consideration the health of the company, its expansion goals and the current attitude of its shareholders. These are the primary factors that affect the amount of dividends paid out to investors.
If a company is doing well and the numbers are adding up nicely, it is more likely to distribute more lucrative dividends to its shareholders. That’s because the company has generated more than enough revenues than it needs to support itself.
That being said, shareholders who have invested in growing businesses do not always receive dividends to match. Businesses that are looking to invest into new markets, nationally or overseas, are going to need to re-invest profits into expansion. This means that buying shares in a company is often a long-term investment that requires patience.
A company may also increase the amount of dividends it pays out to keep shareholders happy. After all, shareholders are the ones who pay the salaries of senior management and, ultimately, the chief executive. Releasing more dividends builds a relationship of confidence between investors and those who are responsible for the day-to-day running of a large company.
In the first quarter of 2019, £20 billion worth of dividends were paid out by British companies to shareholders. Over time – if things go to plan - the dividends received by a shareholder can add up to more than the original investment they made in the business by buying shares.
Who receives dividends?
As we’ve already covered, dividends are paid out to those who have shares in a company. They are the ones who have funded the business’ transformation from an idea on paper to market player. It’s only right that they are rewarded with regular payments once the business has matured in value.
Different types of dividends
Now that we’ve finished our dividend definition, let’s have a look at the different types of dividends that companies pay out. Dividends don’t always take the form of cash. Shareholders can be paid in a number of different ways. The choice made by a company’s directors depends on what they interpret as being best for the business. There are three main types of dividend: cash, property and liquidating. Let’s have a look at these in some more detail.
- Cash Dividend – this is the standard form of dividend that is usually paid out to a company’s shareholders. It’s simple: a shareholder invests money in a company and gets paid back in annual payments once the company has grown.
- Property dividend – in some cases, a company might decide to pay its shareholders in the form of assets. This is a handy tactic when cash is in short supply, or if the business has excess assets. An example might be a car company like Fiat or Mercedes offering brand new vehicles to its investors.
- Liquidating dividend – this kind of dividend is often paid prior to a business shutting up shop. Assets are sold and shareholders are paid back with the money raised to protect their investment. This can be seen as compensation for the devaluation of their shares. After all, you can’t sell shares in a business that no longer exists.
What is the Difference between Dividends and Shares?
To get to grips with what dividends are, it is important to see them as different from shares themselves. While dividends are annual payments paid in return for shares purchased, shares are assets. They have their own value and can be bought or sold at any time for a potential profit.
Also, it’s worth pointing out that a valuable share won’t always deliver hefty dividends. The dividend paid out is entirely dependent on the company’s growth strategy and plans for the future.
What Kind of Company Pays Dividends?
Companies that are publicly listed pay dividends to their shareholders. ‘Publicly listed’ means that they have been floated on the stock exchange and officially become a PLC (Publicly Listed Company). Therefore, all companies that are listed on the FTSE 100 deliver annual dividends to their investors.
Massive companies like Marks and Spencer and Vodafone have recently slashed their dividends to save costs. That money will now be invested back into the companies to secure their market position and prevent further losses.
But big dividends don’t necessarily indicate that a company is flying high. Financial experts see red lights when companies hand out dividends with more than a 10% yield. It is often a sign that a company is struggling and looking to satisfy shareholders in the wake of share prices plummeting.
For example, massive dividends were paid out to shareholders in the finance industry before the 2008 financial crash. Today, companies like Bon Marche – and other struggling high street retailers – are pampering investors with large dividend payments to keep them on side.
How to Earn Money from Dividends
Buying shares in a company is a great way of earning an income. Investment is a lucrative business that pays out big when you hit the jackpot. However, getting it right requires a healthy dose of business knowhow.
When you’re looking for a company to invest in, you want to find one that offers high share potential. That way, you’ll feel the benefits of an increased share price and a steady flow of dividends as the business grows.
It’s important to remember that investment requires long-term vision. The results are not going to be immediate and you’ll have to be comfortable with parting with investment funds in the short term. Of course there’s plenty of risk involved too, so you need to stay on top of market trends.