What is a “Dividend Paid”?
If someone purchases a stock of a company, that person has an ownership stake in that company. This makes them eligible to receive a share (payout) of that company’s profits (after tax) in proportion to the number of stocks they hold.
This share or payout is the dividend paid to shareholders of a company.
A dividend is paid per stock. For example, if a company paid out US$2 million in dividends and it had 5 million shares outstanding, then the dividend per share is US$0.4. Depending on the jurisdiction of the company, dividends can be paid quarterly, half yearly or annually. A cash payment is the most common form of dividend.
Large stable companies make profits most years and many pay dividends to shareholders. However, early-stage companies or high growth companies may choose to reinvest all their profits back into the business to aid growth.
In such cases, the shareholders will not receive a dividend, but as their company profits have been reinvested the value of the company should increase, providing a capital return to shareholders if they chose to sell their shares.
Paying a regular dividend is not legally binding and some companies have a policy not to do this. Amazon is a notable example of a company that does not pay a dividend.
Key Learning Points
- The dividends paid out to shareholders of a company and the frequency of such payouts is dictated by its dividend policy, which in turn is determined by the board of directors who are responsible for approving the planned dividend.
- If a company has a track record of consistently paying dividends to its shareholders or is regularly paying them high dividends, then it tends to attract more investors which results in boosting its stock price. This goes a long way to communicating the strength, sustainability, and positive expectations of the company regarding its future earnings growth. Such companies are usually well-established, mature, and financially strong or stable companies. For example, some companies in the US – such as Proctor & Gamble, Coca Cola, Johnson & Johnson, and Realty Income – have a track record of increasing the dividend they pay to shareholders.
- Consumer staples, energy, utilities, real estate, and telecommunications are the sectors that are the leading options for dividend stock investing.
- Investing in dividend yielding stocks enables investors to profit in two ways: via stock price appreciation and a predictable stream of income via dividends paid to them. Investing in such stocks is one of the ways to create wealth and they tend to have long-term growth potential.
- In addition to dividend paid per share, one should be aware of dividend yield (i.e., dividend paid per stock as a percentage of its stock price). Typically, high dividend yield stocks are known as high dividend paying stocks.
Dividend Paid – An Example
Assume that a company XYZ Ltd has 1.5 million ordinary shares outstanding, and its net profit is US$750,000. If the company directors decide to pay out 50% of its profit as dividends, then US$375,000 is paid out to shareholders. The remaining half of the profits is retained for investment purposes – known as retained earnings.
Having stated the above, given below is a workout of the dividend paid per share to ordinary shareholders and total dividend paid to a shareholder (John) who holds 10 stocks in this company.
Dividend Paying Stocks and Investments
Stocks of companies with a solid dividend paying record tend to be good long-term investments. In the short term, such stocks can experience volatility in their share price, depending on market conditions, which may have nothing to do with the underlying fundamentals of these companies.
Investors looking to add strong dividend paying stocks to their investment portfolio can look at several criteria before purchasing:
- A stock’s payout ratio
- A history of stable or growing dividend payouts
- Does the company have a record of steady revenue and earnings growth?
- Does the company have some form of sustainable competitive advantage over its competitors?
- Is it a high yield stock?