Dividends 101
An investor who buys shares in a business that offers dividends will receive a guaranteed return on that investment in the form of payments throughout the year. Essentially a reward for a shareholder, these dividends can be paid in two main ways, either in money or in additional company shares.
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Definition
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When a company is making profits, there are two ways to spend the money. One is to put the money into the business, using it to make more profits and help the company grow. The other option is to give money back to those who invested in the company; these are called dividends. Often these two options are combined, because a business will both reinvest in itself as well as give the remainder of the profits to shareholders.
Purpose
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Companies often use dividends as an incentive for potential shareholders to invest. The reason these investors like dividends is that they offer a certain reward for putting their money into a company. However, dividends can also have the opposite effect on investors. Some can be put off by the fact that a company is giving its profits back to shareholders regularly instead of using it for its own growth. So a stock that offers a dividend will often have less long-term value than one that does not, but will provide regular and dependable short-term earnings that are not affected by changes in the market.
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Payment in Money
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Usually dividends are paid in at least two installments over the course of a year. The last of these payments is called the final dividend; any before this are called interim dividends. The most common way of paying these dividends is in money. The money will be paid by check or transferred to the bank account of a shareholder at set dates throughout the year. For example, if 200 shares are owned that have a dividend of $1 each, then by the end of the year, $200 will be received by the shareholder. If this is paid four times per year, then the payment will be broken down into four $50 dollar payments.
Payment in Stocks and Reinvestment
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Some companies pay out their dividends in additional stocks rather than money, or provide this as an option. If the shareholder with 200 shares had a 3 percent dividend, then in a single year, 6 extra shares would be added, making 206 shares. Companies that pay dividends in money often offer reinvestment opportunities for shareholders to buy more shares with the money they have made.
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