Thank you for stopping by! Here is my simplified explanation of a dividend with examples! You can find it on my website as well at: https://www.linethosepockets.com/dividends/dividends
The website is still under construction but feel free to peruse :)
A dividend is a payment that a company makes to shareholders for every share they own in their company. A shareholder is any person or entity that owns a share. Dividends can be paid out monthly, quarterly (every 3 months), semi-annually (every 6 months), or annually (once a year).
The money from a dividend is taken from the cash the company has from the profit it has made. In general, a company will pay a dividend to reward its shareholders for owning shares of the company or as a sign that business is going well.
When a dividend is announced it is generally assumed to be ongoing. For example, if Starbucks said they would pay a dividend of $0.25 per share every quarter, then we expect to get that money every 3 months until they say otherwise. If you owned 1000 shares of Starbucks, then you would receive $250 from the company every 3 months.
A company can raise its dividend or lower its dividend. If the company is doing well they can reward their shareholders by raising the dividend, which says "we're doing so well that we can pay our shareholders more for their support." If a company lowers their dividend, or gets rid of it altogether, it may be a sign that the company isn't earning money or hasn't been earning enough to continue to pay its shareholders.
The dividend a company pays can be represented by two numbers, a dollar amount and a percentage. The dollar amount represents how much money they are paying on their dividend per share. The percentage represents how much the dividend pays relative to the share price each year. For example if Starbucks stock costs $25 per share and pays a dividend of $0.25 per quarter, or $1 per year, then they are paying a 4% dividend, since $1.00 is 4% of $25.
Companies that are well established can pay a dividend for a number of reasons. A few strong reasons that a company will pay a dividend include:
The last point is an odd one, but sometimes a company will find it difficult to spend all the money they're making, and instead of just sitting on the cash it can be more beneficial to them to give the money to its shareholders.
Many companies don't pay a dividend and they do so for a number of reasons. A few strong reasons that a company will not pay a dividend include:
The last point again is an odd one, but sometimes a company believes they can find investments in their line of business, or possibly even outside of their line of business, that would result in a better investment than the shareholders can make. The result of a good investment choices by a company can result directly in a share price increase, but consequently a bad investment choice by a company can result in a share price decrease.
One company that is most famous for this is Berkshire Hathaway Inc. The man in charge, Warren Buffet, is known around the world to investors for his incredible capacity to make good investment choices. His company, Berkshire Hathaway Inc., has only paid a dividend to its shareholders once, and for good reason. Warren Buffet has been able to use the company's funds to invest in companies and has significantly beat the average investor for many decades.
