Dividend

A dividend is the distribution of a portion of a company's earnings to its shareholders, typically articulated as an amount per share. Its yield is a popular metric for investors.

Definition

In accounting and finance, a dividend is the portion of a company’s earnings that is distributed to its shareholders. Dividends are typically expressed as an amount per share and are issued as a reward to investors who have put their money into the company’s equity. The company’s board of directors decides the size and frequency of dividend payments, which may vary based on the firm’s performance and strategic retention plans.

Examples

  1. Company A declares a 15% dividend on its £1 shares, resulting in a 15p payment per share. If these shares are currently trading at £5 in the market, the dividend yield would be calculated as (15p / £5) * 100 = 3%.
  2. Company B issues an interim dividend of $0.50 per share after its six-month financial review and follows up with a final dividend of $1.50 per share after its annual financial statements are released.

Frequently Asked Questions

What is a dividend yield?

A dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. It is calculated as (Annual Dividend per Share / Price per Share) * 100%.

How often are dividends paid?

The frequency of dividend payments can vary. In the UK, it is common for companies to distribute dividends every six months, while in the USA, dividends are typically paid quarterly.

What is the difference between final and interim dividends?

A final dividend is paid out at the end of a financial year and is announced at the company’s Annual General Meeting (AGM). In contrast, an interim dividend is paid out midway through the fiscal year and announced during the release of the interim financial statements.

Are dividends the same as interest payments?

No, dividends are distributions from a company’s profits to its shareholders. Interest payments, on the other hand, are the cost of borrowing money, usually associated with bonds or loans. However, interest payments on gilt-edged securities are sometimes colloquially referred to as dividends, despite being fixed.

What is a dividend warrant?

A dividend warrant is a document drawn on a company’s banker that authorizes the bank to pay the approved dividend to the shareholders. In the USA, the equivalent is typically a dividend check.

How is the size of a dividend determined?

The size of a dividend is determined by a company’s board of directors based on the firm’s profitability, cash flow, and strategic financial goals. The board decides how much to retain in the business for growth and how much to disperse to shareholders.

  • Par Value: The nominal or face value of a share of stock as stated by the issuing company. Par value is largely an accounting antiquity and is less relevant in modern equity valuation.
  • Dividend Yield: A metric used to measure the ratio of a company’s annual dividend compared to its share price.
  • Final Dividend: The largest dividend distribution, typically announced at the AGM along with the company’s annual results.
  • Interim Dividend: A smaller dividend payment made mid-way through the company’s fiscal year.
  • Dividend Warrant: An instrument issued by a company to authorize the bank to pay the dividend to shareholders.
  • Gilt-edged Securities: High-grade bonds issued by a government that pays a fixed interest rate, sometimes referred to as dividends.

Online Resources

  1. Investopedia: What Is a Dividend?
  2. Financial Times Lexicon: Dividend definition

Suggested Books for Further Studies

  1. “The Little Book of Big Dividends: A Safe Formula for Guaranteed Returns” by Charles B. Carlson
  2. “Dividends Still Don’t Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market” by Kelley Wright
  3. “Common Stocks and Uncommon Profits and Other Writings” by Philip A. Fisher

Accounting Basics: “Dividend” Fundamentals Quiz

### What is a dividend? - [x] The distribution of a portion of a company's earnings to its shareholders. - [ ] A payment made by the company to its employees. - [ ] The amount paid for purchasing stock. - [ ] The interest paid on borrowed funds. > **Explanation:** A dividend is a portion of a company's earnings paid to shareholders, usually expressed as an amount per share. ### What is a dividend yield? - [x] The percentage of a company's current share price that it pays out in dividends each year. - [ ] The nominal value of the dividend declared. - [ ] The increase in share price due to dividend announcement. - [ ] The interest received from dividend payments. > **Explanation:** Dividend yield is calculated as `(Annual Dividend per Share / Price per Share) * 100%`, representing the annual dividend return relative to the current share price. ### What is an interim dividend? - [ ] A dividend declared by new companies. - [x] A smaller dividend payment made mid-way through the company’s fiscal year. - [ ] The interest paid on bonds. - [ ] The final annual dividend payment. > **Explanation:** An interim dividend is issued by a company midway through its fiscal year, typically accompanying the interim financial statements. ### How frequently are dividends paid in the USA? - [x] Quarterly - [ ] Annually - [ ] Every six months - [ ] Monthly > **Explanation:** In the USA, dividends are usually paid quarterly. ### Who decides the size of a dividend? - [ ] Shareholders - [ ] Government - [x] Board of Directors - [ ] Financial Consultants > **Explanation:** The company’s board of directors determines the size of the dividend based on profitability, cash flow, and strategic goals. ### What is the equivalent of a dividend warrant in the USA? - [ ] Interest Statement - [ ] Equity Voucher - [ ] Profit Share Certificate - [x] Dividend Check > **Explanation:** In the USA, dividends are typically paid via a dividend check, the equivalent of a dividend warrant in the UK. ### What does "par value" refer to? - [ ] The current market price of a share. - [x] The nominal or face value of a share stated by the issuing company. - [ ] The annual dividend payment. - [ ] The interest on bonds. > **Explanation:** Par value is the nominal or face value of a share as originally stated by the issuing company. ### Can dividends vary from year to year? - [x] Yes, based on company performance and decisions by the board of directors. - [ ] No, they remain constant. - [ ] Only if a company changes ownership. - [ ] Only companies with fixed dividend policies can vary them. > **Explanation:** Dividends can vary year to year depending on the company’s performance and retention plans determined by the board of directors. ### What term is sometimes used in the UK to refer to interest payments on gilt-edged securities? - [ ] Yield - [ ] Bonus - [x] Dividend - [ ] Equity > **Explanation:** In the UK, interest payments on gilt-edged securities are sometimes colloquially referred to as dividends, though they are fixed payments. ### What is the final dividend? - [ ] The first dividend payment of the year. - [ ] An interest payment rendered annually. - [x] The largest portion of the dividend distributed at the end of the fiscal year. - [ ] An unscheduled payment to shareholders. > **Explanation:** The final dividend is the largest portion of the dividend, announced at the AGM along with the annual financial results.

Thank you for exploring the concept of dividends with our comprehensive breakdown and quiz. Keep enhancing your financial proficiency!

Tuesday, August 6, 2024

Accounting Terms Lexicon

Discover comprehensive accounting definitions and practical insights. Empowering students and professionals with clear and concise explanations for a better understanding of financial terms.