The financial market has a lot of terms that can make investors scratch their head. For people concerned about their stock options and their retirement accounts, knowing what some of these terms mean can be very helpful toward actualizing an investment strategy. One term thrown around in financial discussions is the term dividend. Let's explore what this financial term means.
What is a Dividend
A dividend is a payment that is given to a shareholder of a company. This form of payment is one type of income that a shareholder can receive when they hold shares in a publicly traded business. Dividends are processed from the profits of the company. As a result of the profits and investments from shareholders, dividends become a payment option for those with majority shares in the company.
A dividend can be cash or stock, but no matter what, it is considered taxable income for a shareholder. However, shareholders often reinvest their dividends in other financial investments so they can diversify their portfolios. Dividends become such crucial aspects of the company's activities, that contracted dates are set up for when the shareholders can expect to receive their dividend. This is important because it is in the company's interests to get all pending payments it has completed at least 2 days before the company has to provide dividends. Otherwise, the company may appear it is losing money every quarter as a result of pending payments after the company pays out its dividends.
Dividends and Stocks
A dividend is not directly subject to the health of the stock. Instead, as long as the shareholder maintains their share in the company, they are guaranteed their return in the form of dividend income every three months or quarterly. A dividend can be fixed-rate, as determined by the shareholders, or they can be a varied-rate, which will increase or decrease depending on the quarterly profits of the company.
A dividend is not guaranteed by law, however. A company, especially if their fiscal health is in crisis, can reign in their dividend payments and not pay shareholders in that way. In addition, some newer companies that become publicly traded seldom offer dividends because of their age; these companies tend to be more fiscally volatile during their growing years. The older a company is on the stock market, the more likely the company will provide dividends to its shareholders.
Dividends exist so they offer an attractive appeal to investors to buy or maintain their shares of a company. For people interested in investing in companies with a stable growth plan, dividends can provide regular income or new revenue to use for other investments. In addition, shareholder payouts influence the health of stocks since the payout directly affects the balance sheet of the business. Hence, investors and observers of the stock market should try to pay attention to how stock prices react when the company provides its dividend payout.
