What is Dividend?

What is Dividend?

Dividend is the process of a company to distribute an amount of the company profit (this amount is determined by the company) to its partners during a period (it can be 1-3 months or 1 year according to the company's decision). Dividends can be paid to shareholders in the form of cash or stock.

How Dividends Work?

The company's dividend is approved by the shareholders through their voting rights. Although cash dividends are the most widely used method, they can also be used to pay for stocks or other financial assets. In addition to companies, various mutual funds and some traded funds also pay dividends.

Why Do Companies Pay Dividends To Shareholders?

Dividends are a symbolic reward that companies give to their shareholders for their contribution to their equity capital, and it is an amount that the company sets aside from its profit for the period. Often the reason why some, but not all profits, is not distributed as dividends is because the company will invest in its equity with the remainder of the profit. Thus, the company can grow itself, invest more in R&D and marketing, so that the growing company can earn more profit for the period. Sometimes companies may pay dividends to maintain regular dividend payout histories even if they are not making a profit.

The share of the dividend payment from the profit is determined by the board of directors of the company. The Board of Directors may decide to distribute dividends at different rates in various periods. Dividends can be paid monthly, quarterly or annually.

Corporations may also pay a one-time dividend in private.

Which Company Sectors Are Seen as Trustworthy by Shareholders?

Larger, more established companies with more predictable profits among companies are often the ones that pay the best dividends. Such companies pay regular dividends as they try to maximize the wealth of their partners. According to research, the following companies keep a regular dividend payout record;

  • Base material
  • Oil
  • Banks and Finance
  • Healthcare and Pharmaceutical Companies

Important Dividend Terms

Announcement Date: The date the dividends are announced by the company management.

Former Dividend Date: The date when the dividend right expires. Right holders cannot receive payment for the stocks they bought after this date.

Recording Date: The closing date determined by the company to determine which shareholders are eligible to receive dividends.

Payment Date: It is the date range that the company transfers the payments to the investors' accounts.