Aside from the net and gross profit, investors of large companies look for another calculated metric before putting their money into a company—the dividend yield. The dividend yield lets investors know how much they will receive per year concerning their original investment. A higher yield shows how financially competitive a company is relative to its industry, thus making investors want to invest more.
Of course, this is only possible for those dividend-paying companies in the business industry. If you are a mature, slow-growing, yet stable firm, maybe it is time to consider distributing corporate earnings to your shareholders. It is time to communicate your financial prowess and shareholder value to the world.
What Is A Dividends?
Dividends pertain to the process of doling out company earnings to your stockholders. When a firm generates a profit, it will also accumulate retained earnings that can either be paid out to stockholders or be reinvested in the business to assist growth.
Once the management decides to pay back shareholders and allocate a value per share, the board of directors will then approve the proposed dividend. It will be announced to the company and paid out on the payable date. Companies pay dividends on a quarterly or annual basis. However, the board of directors will be the one to decide how often dividends will be paid out.
For example, an enterprise declared an annualized dividend payment of 50 cents. For quarterly basis payments, enterprises will pay ¼ of 50 cents at the end of every business quarter for each stock an investor owns.
Looking at it, it may not seem like a lot. But once you start building your portfolio into thousands of shares, a 50-cent per-share payment is going to make you thousands of dollars in a year.
Dividends can be paid in a variety of forms, such as cash, asset, special, common, and stock dividends.
How Do Stock Dividends Work?
A stock dividend is a form of dividend payment that is made in shares or stocks rather than in cash. It is a way to distribute profit and wealth to shareholders in the form of additional shares of stocks. Corporations dole out dividends in stock form to:
- Avoid reducing their liquid assets, especially when the firm is low on cash on hand.
- Increase the number of owned shares
- Transfer its retained earnings to paid-in capital.
- Lower the price of a share on a per-share basis
Companies usually pay investors based on the percentage or amount of stock they own.
Say, company A approved a 5% stock dividend. This means that an existing shareholder will get an additional share of company stock for every 20 stocks they own. A 5% distribution is equivalent to 0.05 shares per current stock owned. Thus, an investor with a current share of 100 stocks will now own 105 once the dividend is paid.
Is It Preferable Than Cash?
For investors who are looking for a quick return of investment, opting to invest in cash dividend-paying companies is a better option. However, stock payments also have their own set of rewarding advantages that can affect both the company and the shareholders.
There is a reason why huge companies such as Microsoft opted to dole out stock payments to investors. Many of its employees, who invested in their stocks (bought at $21 per share), are now multi-millionaires. This feat also made its owner, Bill Gates, one of the richest men in the world.
Stock dividends are as good as cash but without the burden of a tax. It is a great way to preserve a firm’s liquid cash to maintain an advantageous cash position. If you have questions about how this applies to your business, feel free to get in touch with Annette & Co.!