Why do companies pay dividends 1
Equities: questions and answers about dividends
The dividend belongs to the share like the interest to the fixed-term deposit. Companies that have managed to regularly pay dividends to their shareholders over decades are proud of it and advertise with it. Foundations and business families depend on their annual dividends. And it is also important for many small investors.
What is a dividend?
The dividend is the part of the profit that a stock corporation pays out to its owners - that is, to the shareholders. That is why stocks are sometimes called equity securities.
How often is the dividend paid?
Most companies pay a dividend once a year. Others distribute part of their profit over the year - for example, they pay a dividend every quarter. Finally, there are the companies that don't pay any dividends at all. This may be because they are simply not making a profit to distribute. But it can also be a strategy. Such a strategy can make sense for a number of reasons. One reason: the assumption that the money generates a higher return if you leave it in the company and use it for investments. Another: possible tax advantages for shareholders.
What types of dividends are there?
It is customary to distribute profits as a cash dividend: a predetermined amount is credited to the shareholder's account for each share.
There is also the so-called stock dividend. "Stock" is the English word for share. A stock dividend is the distribution of a dividend in the form of shares. Instead of cash in the account, a shareholder has additional shares in his company in his custody account after such a distribution.
It is also possible to distribute material assets. This can be, for example, shares in a subsidiary that a company wants to spin off. The shareholders then own two separate companies. Such a dividend is also known as a dividend in kind.
Who decides on the distribution of a dividend?
The owners themselves - at the annual general meeting of their stock corporation. Before that, however, the board of directors makes a dividend proposal. Most of the shareholders agree to this proposal. Usually, the dividend is paid out directly on the day of the general meeting.
What do I have to do to have the dividend credited to me?
Nothing. It will be automatically posted to your account. However, it is possible that you will have to apply for the cash dividend to be exchanged for a stock dividend - if your company offers this option (and you want to take advantage of it).
Is it worth buying the stock because of the dividend the day before the distribution and then selling it directly?
No. The stock market cannot be tricked that easily. When the dividend is distributed, the share is traded "ex-dividend", without the amount distributed. The share price drops accordingly. This is logical, after all, the company has less capital after the distribution - it sinks in value.
But maybe it is then worth speculating that the share will fall in price because of the dividend distribution?
No, it's not worth it either. Because the providers of warrants and certificates, with which private investors can speculate on falling prices, calculate the dividend payments in the prices of the speculative instruments. That means: Such papers do not rise because of the dividend distribution.
What is the dividend yield?
The dividend yield is a key figure for assessing stocks. It is obtained by dividing the amount of the dividend per share by the share price and multiplying the result by 100.
Example: Schnellvielgeld AG plans to pay out a dividend of 50 cents per share soon. The share price stands at 10 euros. The dividend yield is therefore exactly 5 percent.
Many investment strategies place particular emphasis on dividend yields, and there are a number of funds that invest in stocks with particularly high dividend yields. Even so, the fact that a stock has a high dividend yield does not necessarily mean that it is a particularly profitable investment: Market participants may expect the company's profits (and thus dividends) to be lower in the future. Or, conversely, they expect companies that have not yet paid any dividends to make particularly high profits in the future and pass them on to investors. So there are many reasons not to (only) rely on this metric when looking to buy stocks or equity funds.
Where can I find information about the dividend on my shares?
The dividends paid in recent years are listed in various finance portals on the Internet.
In addition, estimates of the amount of future dividends are often published. The estimates are based on forecasts by stock analysts. These are to be enjoyed with caution, after all, nobody knows the future - not even the best-paid experts.
What do equity funds do with the dividends that are paid to them?
Equity funds collect dividends first. You then pass them on to the shareholders. This can be done through a distribution. In this case, money actually flows into the accounts of the fund owners. Or it can be done through an accumulation. In this case, the fund reinvests the dividends that have accrued and the price of an individual share increases accordingly.
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