What is a Dividend?
A dividend is a distribution payment to a company’s shareholders. The payment is derived from the company’s profits and is usually paid on a quarterly basis, although can be more or less often depending on the board’s preferences. A shareholder will receive a dividend payment providing they have held the share before the ex-dividend date. Shareholders that purchase the shareholder after the ex-dividend date won’t be entitled to the upcoming dividend payment, but will be to any distributions thereafter.
Dividends can be distributed as either a cash payment, or additional shares (often “B Shares”).
Why would a company pay a Dividend?
The main reason for dividend payments is to incentivise investors. The distribution acts as a reward for shareholders, although will be subject to tax if above the individual’s annual dividend allowance. Dividends may also be paid to employees of the firm as an incentive to work there. Typically, more mature companies pay a dividend as younger companies may not be well-enough established or have the capital available to pay dividends.
What is a Dividend Yield?
The dividend yield shows how much a company pays as a percentage to it’s share price. The following formula should be used to calculate a company’s dividend yield:
Dividend Yield = Dividend Per Share / Share Price
