Cash dividends represent ownership to a firm’s distributed profits to shareholders and provide an incentive to investors to own the shares of large companies, even if they are not growth-oriented.
Companies that pay cash dividends typically generate strong cash flows for subsequent quarters and are widely viewed as financially healthy. However, most of the dividend-paying companies are not growth-oriented. Instead, they are seeking to increase shareholder value and generate a steady stream of income for their shareholders.
They are also seeking expansion into new markets and are focusing on new investment opportunities. Some dividend-paying companies set their dividend payout ratio ideally around 50%-55%, and they distribute the relevant amount of retained to their shareholders as a dividend.
Steve owns 1000 shares of a technology company. The company is a leader in the sector and is consistently delivering dividend payments for 54 consecutive years. The company’s board of directors determines a dividend of $2.66 per share, which is an increase of 13% from the previous quarter. The increase is a part of the company’s financial strategy to attract more investors and maintain its financial ratios stable. Based on the new dividend per share, Mark is entitled to 1000 x $2.66 = $2660.
Before the distribution of the dividends, the company’s board of directors declares the dividend (declaration date) on September 15th. Then, it decides the record date to be on September 20th, on which it reviews its books to determine the shareholders who are still owning the company’s shares. Mark holds the company’s stocks on September 20th, and he can receive the dividend payment.
In addition, the company declares an extra dividend because their quarterly results for five consecutive quarters were extraordinary and the company’s management wants to compensate the shareholders. Conversely, in the cases that a company goes bankrupt, common shareholders are entitled to the proceeds of asset liquidation.