Dividends are payments made by a corporation to its shareholders. The idea is that when a company makes a profit, it either reinvests it into the business or it distributes it to shareholders. Dividends are distributed in one of two ways: either through cash payments or shares. Investing money in dividend-paying investments may be a wise decision.
How Dividends Work
A dividend is a allocated as a fixed amount per share, and so each shareholder receives a payment based on how many shares they own. For example, the Board of Directors can declare an annual dividend of $1. That means for each share you own, you will receive $1.
The dividend must be declared and approved by a company’s Board of Directors before it is paid, and it must comply with all bylaws of the company. The company announces what date the dividend is payable on, which is the Ex-Dividend date. That means, if you’re a shareholder on that date, you will get a dividend even if you sell your shares after that date. The company then also declares a payment date, which is the date that the check will actually be sent. They can be far apart sometimes, or even never paid.
Some start-ups declare dividends and put them on their books, but don’t actually pay until years after, once the cash flow is actually sufficient to pay the dividend.
Why they are Beneficial
Dividends are beneficial to shareholders because they boost your return on the company. In fact, Warren Buffett recently announced that the amount of dividends he has received from Coca Cola have covered his total cost in his position in the business. That means he’s been totally paid back for owning that company.
Long term studies have shown that dividends, especially those reinvested into the company, and extremely important to maximizing the return of the individual investor. The dividend reinvested would compound, and create even more cash flow later. This, once again, would be compounded, and the growth of both the position in the company, and the amount of dividends, would be very large. That is the power of dividend reinvestment.