Common stock dividend
The common way to make a profit in the stock market is investing in a stock at a certain price and then selling off that stock at a higher price than initially purchased. An alternative way for investors to earn profits in the stock market is through receiving dividends: however not all companies offer dividends. Dividends are a cycle of payments made by a company to the shareholders of that company. The shareholders invest in common stocks, which is a form of corporate ownership of a company. Big companies are usually the ones that distribute common stock dividend because they can afford to. A common stock dividend is a dividend that is paid by a company to the companies' common stock owners/shareholders.
Contents
- Common stock dividend
- Common stock relates to the health of a company
- Why companies offer dividend reinvestment plans
- How dividends work
- References
Common stock relates to the health of a company
The ability for a corporation to offer or not offer common stock dividends is an indicator on whether or not a company is healthy. If a certain company is constantly paying out common stock dividends year after year and the dividends rise steadily, this means that the company is most likely doing very well and is profitable because they have the extra money to distribute to their shareholders every time it is time to pay the dividends they owe. On the other hand, Say a company that used to offer common stock dividends to their shareholders suddenly stopped paying out. This is most likely an indicator that the company cannot afford to offer the common stock dividend to the stock holders anymore because the company would not be profitable if they do. Usually companies that are not making a profit, or are not making a profit, tend to cut their common stock dividends in order to save money for the company. For example, in 2001 Ford Motor Company was facing its worst cash flow crisis since the early 1990s. The company was doing poorly so they cut their common stock dividend by fifty percent in move to save one billion dollars a year (Shirouzu 2001).
Surprising trends in common stock price dividend offerings are an indicator in company health as well. A company that suddenly offers a very high dividend and has not offered dividends, or offered very small dividends, in the past is an indicator that the company is not profitable. This act is common in companies that are luring in people to purchase their stock in order for the company to grow. Sudden high dividend offerings relates to ‘unhealthy' companies.
Why companies offer dividend reinvestment plans
A dividend reinvestment plan is a plan offered by a company to the shareholders. This means the shareholders can purchase additional shares or fractions of shares of the same company. So the company does not give a dividend check to the shareholders when it is time to pay the dividends. Instead, the company takes that money and buys additional shares of the company under the investors' names. Therefore, the investors receive additional shares as a dividend.
Some companies offer dividend reinvestment plans instead of common stock dividends because of the low-cost access to capital. When an investor buys a stock of a company, that investor is actually purchasing the stock from another investor and not the company. Thus, the company is neutral in the sale; no benefits are seen by the company in the transaction. However, with dividend reinvestment plan shares (DRIP), the investors shares are purchased directly from the corporation and the proceeds are reinvested back into the company.
How dividends work
The board of directors, elected representatives of shareholders/stockholders, is a group of individuals that announce and declare a dividend. The day that the dividend is announced on is called the declaration date. This day is very important to investors who are looking to invest in a stock that yields dividends. In regards to dividends, the date of record is the day that a stockholder needs to be registered by in order to receive the dividend. If a stockholder registers on or before the date of record then the investor is classified as a holder of record. A company's payment date is the day the Company disperses its dividends to all of the holders of record invested into that said company. Payment dates differ between companies; however dividends are usually distributed 3 weeks after the date of record. Each company provides different dividends amounts to their shareholders. The dividend yield of a company is the percentage paid to the investor. In technical terms it is defined as the dollar amount of the dividend over the (divided by) common share price of the stock. Dividends are a way to make money in the stock market even if the stock one purchase is not going up. It is a good thing for investors to know which companies have good dividends and/or which companies can afford to maintain their current dividends. That is where the dividend payout ratio comes into play. This ratio is an indicator for investors about the companies that they might potentially invest in. This ratio can be broken down to a very simple formula which is: dividend per share divided by a company's common earning per share. This dividend payout ratio is a great indicator on whether or not a company can continue to pay its investors the dividends.
The regular type of dividend or the more common type is called cash dividend. Cash dividends are nice because a shareholder can liquidate their cash dividends. When a certain company on the market is profitable and doing well they can get cash dividends declared by the board of directors. A cash dividend is the distribution via cash of the profits the company makes. The common shareholders, the owners of the company, receive this cash dividend.
Cash dividends are good for people that want to liquidate their money from the market and not reinvest their dividends. However, cash dividends are not the only type of dividend. The main type of dividend referring to common stocks is called a stock dividend. Unlike cash dividends, stock dividends do not involve the distribution of cash to the common stock owners. Instead, a stock dividend distributes additional stock of the company to the owners of the company (people that own stocks of the company). Stock dividends have equity. They are even dispersed to the people who own stock depending on their portion of ownership in a corporation. If a corporation is declared a 20% stock dividend then this means the corporation will give out 2 shares for every 10 shares to the shareholders. Those are the two different types of dividends that can be offered to the shareholders of a common stock.