Here’s all you need to know about dividends!
A company can do two things with the profits that remain after deducting all the expenses:
a) reinvest the profits into the business or b) distribute a portion of the profits to the equity shareholders.
A company is free to do either because payment of profits to equity shareholders is not a legal obligation. However, when it decides to go with the second option, it is known as dividend payments. It is the distribution made based on the number of shares owned by the equity shareholders.
Dividends can either be in the form of:
A) Stocks - Stock dividends are also known as bonus issues of shares, as the company distributes extra shares to investors in place of cash payments.
B) Cash - Cash dividends, on the other hand, are cash distributions made to a company’s shareholders. These are typically paid out at regular intervals and are known as regular cash dividends. Contrary to these, when a company pays an additional dividend along with the regular cash dividends, or when a company that does not pay dividends regularly, pays a dividend, it is known as an extra dividend or special dividend.
Now let’s take a look at how the cash dividends are paid out -
1) Declaration date - This is the day when the company issues a statement declaring a specific dividend.
2) Ex-dividend date- Also known as ‘ex-date’, this is the first date on which a share trades without the dividend.
3) Holder-of-record date- This is the date on which the shareholder listed on the company’s books is deemed to be the one to receive the upcoming dividend. This date is known by many names such as owner-of-record date, shareholder-of-record date, record date, date of record, or date of book closure and falls one or two business days after the ex-dividend date.
4) Payment date- Also known as a payable date, this is the day when the company makes the dividend payment to the shareholders.