Stock market basics: What is a dividend?

Julie Brownlee, Fsp Invest, 02 Apr. 2014

Tags: dividends, what is the dividend, definition of a dividend, why companies pay dividends, company, companies paying dividends,

You may have heard of companies paying dividends. But what is a dividend? Why does a company pay out dividends? And how does a company decide how much to pay out? Let’s take a closer look at what you need to know about dividends…

The definition of a dividend

A dividend is portion of the company’s profits given out to its shareholders, according to Investopedia. The company usually declares the dividend amount on a per share basis.

In South Africa, if a company pays a dividend, it’s usually twice a year. This coincides with when a company releases its half-year (interim) and full-year accounts.

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Why would a company pay a dividend?

Not all companies pay dividends. It’s entirely up to a company whether it does so or not. Generally speaking larger, solid companies tend to pay dividends. Younger, growing companies tend not to.

A company pays out dividends to its shareholders to reward them for holding the shares. It’s their cut of the company’s profits.

If you hold shares in a company that’s showing high growth, but doesn’t pay a dividend, you usually benefit from a rising share price. With a larger, more solid company, the share price may not rise as quickly, but the dividend you receive could make up for this,

How a company decides on the size of its dividend

When a company does its accounts, it knows what its earnings are for that half-year or full-year, Gareth Stokes in Fear, Greed and the Stock Market explains. The company will then decide of that amount, how much is it going to pay out as dividends and how much it will keep.

The company usually reinvests any earnings it keeps back into the business.

So there you have it, what you need to know about dividends.

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