Every one or other day you noticed that some other companies announce the dividends to shareholders. Also, some analysts and well-known investors give statements that dividend-paying stocks are good for long term investing. But the question arises that what is dividend and how it affects to market and shareholders. So, let’s understand each and every prospective of dividend and dividend yield.
What is Dividend?
According to the definition, Dividends is the distribution of some part of the particular company’s earnings or profits to shareholders. In other words, a dividend is a reward that is given by the public limited or publicly listed companies to their shareholders. The dividend is the part of the company’s profit that the company or the board members decide to give to shareholders as a dividend.
But it is not mandatory for a company to announce dividends. If the company’s board of directors and management decides to reinvest their profit for the growth, they can. In general, small-cap or mid-cap companies don’t give any dividends to shareholders. Because they reinvest that earnings and profit for the company’s future expenses and growth.
Types of Dividends
If a company declares to pay dividends to its shareholders then it can do it in two ways. Depending on the frequency of the declaration. There are two subtypes in it the first one is a special dividend and the second one is the Preferred dividend. Let’s understand it one by one.
Special Dividends
This type of dividend is declared by most companies. When the company noticed that they have an excessive amount of cash and there is no need for that cash in near future or they earn substantial profits over a long period of time then the company declares that profit as a dividend.
Preferred Dividends
We can compare the preferred dividends with some kind of interest that is paid on bond-like instruments. This dividend is declared by some companies to its shareholders. It commonly gives a fixed amount of pr declared amount quarterly. These types of dividend shares act more like bonds.
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Dividend Impact on shares current market price
Generally, the payout of the dividend does not affect the current market price. But we can notice some kind of predictable market fluctuation in that particular stock that declares the dividends. Such as when a company announce the dividend the current price of that particular share experiences the bull phase. After the expiry date of the dividend that share was corrected to before price. Usually, everyone wants the dividend so when the news comes on the market the traders or investors buy that particular stock to receive the dividends after that they sell off the position. So, It’s a kind of swing trading with the benefits of dividends.
Important Terminologies:
Announce Date: Announce Date is the date when the company’s board members declare or announce the dividend.
Ex-Dividend Date: This date refers to the eligibility for the dividend.
Record Date: It is the cut-off date. On this date, the shareholder’s eligibility income is scrutinised.
Payment Date: This is the date when an investor or a shareholder gets their dividend amount in the bank.
Conclusion:
definition Dividends is the distribution of some part of the particular company’s earnings or profits to shareholders. But should you buy the dividend-paying stocks or not? It depends upon the risk profile and investing style of the investors. Because some investors want steady growth with some extra income those can prefer to buy high dividend-paying stocks another side some investors believe that if the company gains profit then they have to invest in the growth of the company if the company pays out earnings as a dividend it will not good for company’s growth. So, whether you should buy the high dividend-paying stocks or not it is strongly depending on your investing methodology.