Word of the Week
What is a 'Dividend'
A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, paid to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.
BREAKING DOWN 'Dividend'
The board of directors can choose to issue dividends over various timeframes and payout rates. Dividends are typically monthly or quarterly. It is also common for a company to issue special dividends either individually or simultaneously with a scheduled dividend. Investors often view the company’s dividend by its dividend yield which measures the dividend in terms of a percent of the current market price. The dividend rate can also be quoted in terms of the dollar amount each share receives (dividends per share, or DPS). A company's net profits are an important factor in determining a dividend. Net profits can be allocated to shareholders via a dividend, or kept within the company as retained earnings. A company may also choose to use net profits to repurchase their own shares in the open market in a share buyback. Dividends and share buybacks do not change the fundamental value of a company's shares. Dividend payments must be approved by the shareholders and are managed by the board of directors.
Companies That Issue Dividends Start-ups and other high-growth companies such as those in the technology or biotechnology sectors rarely offer dividends. These companies often report losses in their early years and any profits are usually reinvested to help sustain higher-than-average growth and expansion. Larger, established companies with more predictable profits are often the best dividend payers. These companies tend to issue regular dividends as they seek to maximize shareholder wealth in ways aside from supernormal growth.
Companies in the following sectors and industries have among the highest historical dividend yields: basic materials, oil and gas, banks and financial, healthcare and pharmaceuticals, and utilities. Companies structured as master limited partnerships (MLPs) and real estate investment trusts (REITs) are also top dividend payers since their designations require specified distributions to shareholders.
Arguments for Issuing Dividends The bird-in-hand argument for dividend policy claims that investors are less certain of receiving future growth and capital gains from the reinvested retained earnings than they are of receiving current (and therefore certa