Why Do Dividends Fluctuate?
Investors choose investments for a wide variety of reasons. Some investors are looking to speculate and make a lot of money fast by investing in something risky like a biotech stock, while others are looking to preserve capital and just make a little interest, and tend toward investments like very low risk short-term bonds. Most investors, however, have a moderately conservative overall strategy, and are willing to risk exposure to stocks, but only less volatile dividend-paying stocks.
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Definition of Dividend
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A dividend is a portion of the earnings of a company that is paid directly to the shareholder. The dividend is paid as a specific amount per share that is set by the board of directors of a company. Most dividends are paid quarterly, but some are paid biannually or annually.
Dividend-Paying Stocks
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Most stocks do not pay dividends. Only larger, more established companies tend to pay dividends, and even among larger companies dividends are only typical in specific industries like utilities or financial/banking companies. The general reason for this is smaller companies need to reinvest their earnings/profits back in the company to grow the business, and even larger companies in some industries go through phases where they need to accumulate large sums of capital for various future business reasons, and thus do not want to distribute profits to shareholders.
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How Dividends Are Determined
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The board of directors of a corporation determines the current dividend paid by that company, if any. The general rule is that the bigger the profits that quarter or that year, the bigger the dividend, but there are many exceptions to that rule. Sometimes companies even have to completely suspend paying dividends because of a major adverse financial setback for the company. For example, BP suspended its dividend after the 2010 oil spill in the Gulf of Mexico due to expected costs in cleaning up the catastrophe.
Why Dividends Change
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A company may change the amount of its dividend for many reasons. A dividend is generally increased if profits are high, and decreased if profits are low, but many other factors are also involved in the decisions about dividends. Sometimes a company will declare a special one-time dividend if it wins a big court case or settlement or comes into a large sum of money for another reason. Larger companies typically won't reduce their dividend just because of one bad quarter, but usually will if profits are down significantly for several quarters. Companies usually try to avoid reducing their dividend if at all possible as it reflects poorly on management and often hurts the stock price.
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