What Is A Dividend

D ividends are a form of corporate income. Dividends enable income investors the opportunity to enjoy a healthy stream of income for holding shares in a prosperous business.

Income investors typically do not rely on the stock price increasing over time. Instead, they invest for consistent dividend payments whose value grows alongside the company itself. This article aims to highlight what is a dividend and its types in detail.

What Is a Dividend?

A dividend is a payment made by a corporation to its shareholders, usually as a portion of its profits. They are issued quarterly or yearly based on how often the company makes a profit.

Dividends can be paid in actual cash or additional shares when a company is profitable. For example, a more mature company may have more shares outstanding and less cash on hand and will prefer to return a profit to stockholders via dividends rather than via additional capital investments.

Types Of Dividends

Dividends are a common way for a company to share the profit from its operation. Dividends come in the following types:

Cash Dividends

Cash dividends are the most known type of dividend paid by companies. It is a regular periodic payment of a portion of its cash reserves to its shareholders.

Stock Dividends

Stock dividends, or "stock splits," distribute additional shares to shareholders when a company has extra profits or wants to make its stock more attractive. Moreover, they can provide a boost to your portfolio.

Dividend Reinvestment Programs

If you are looking for a way to acquire more shares of your favorite companies, a dividend reinvestment plan may be the answer you have been searching for.

A Dividend Reinvestment Program (DRIP) gives you the ability to reinvest all or part of your dividends back into more shares, at no cost and with no restrictions on timing.

Special Dividends

Special dividends are payments made to shareholders because the company has an overabundance of profits or to pay out a decision that was made on the corporate level.

Preferred Dividends

Preferred Dividends are payments made to the owners of preferred stocks. They're a version of regular dividends but paid out only to select stock owners rather than familiar stock owners.

Advantages Of Dividend

Investor Interest

An investor is likely to give more importance to a company that pays stable dividends. This is because dividends assure investors of a reliable source of earnings, even if the market value of the share falls.

Investors interested in income-producing investments will often focus on companies with consistent histories of dividend payments.

Financial Stability

Financial Stability has become increasingly important to investors in the form of paying dividends over the last few years. This also gives you a picture of the company's earnings and its ability to provide you with a steady income stream.

No Need To Sell Shares

Investing in dividend stocks is the best approach for building wealth—no need to sell your shares for participating in the growth of the stock.

Disadvantages of Paying Dividends

Clientele Effect

In the long term, there may be a loss in clientele as some companies can't meet the dividend expectations of their investors. In addition, if the business is making greater profits but is not sufficiently deploying them on expansion or marketing exercises, this may reduce its future growth prospects and result in a price drop.

Decreased Retained Earnings

The company will reduce its assets by paying dividends, and debt obligations may become an issue if the company is not generating enough cash flow to meet its financial obligations.

Limits Growth

A company's growth is one of the objectives that every company wishes to achieve. Paying dividends reduces a company’s cash reserve, thereby limiting its ability to invest in growing the business. Since most companies aim to grow and expand, it makes sense to avoid dividends.

Like any investment decision, it's essential to research what is divided before you invest and remember not to get caught up in the hype surrounding "high yield" stocks. Instead, be sure you understand the business and product behind a company before you buy its stock. With that knowledge, you can determine whether the dividend is sustainable and worth your investment.

Now that you know what is a dividend, you can go forward and earn more.