Dividend definition
/What is a Dividend?
A dividend is a payment to shareholders of a portion of a corporation's earnings. The amount to be paid is decided by the organization's board of directors. The payment is usually in cash, but can also take the form of property or additional shares of stock.
Dividends are typically paid on a recurring quarterly or annual basis, though the board may occasionally vote to issue a one-time dividend, usually as a distribution of a large amount of cash received by the business, and for which there is no internal need. On an ongoing basis, dividends are usually set at a consistent and predictable level, so that investors will be more willing to hold the stock as a reliable form of income. They typically use the dividend yield measure to calculate the return they are receiving on their investment.
Newer and rapidly-growing companies rarely issue dividends, since they need the cash to fund their growth. Instead, larger firms with steady market shares and less internal need for cash are more likely to issue dividends.
Disadvantages of Dividends
A problem with using a consistent payment strategy for dividends is that a decline in the announced amount of the dividend to be paid is a clear signal that the firm is having cash flow difficulties, which can trigger a significant sell-off of shares, dropping the market price of the stock. Another problem with dividends is that shareholders are taxed on the amount received; this constitutes double taxation, since the issuing entity also paid taxes on its earnings.
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