Complete Guide To Corporate Finance

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Dividends - Introduction To Dividends

When a company earns profits from operations, management can do one of two things with those profits. It can choose to retain them - essentially reinvesting them into the company with the hope of creating more profits and thus further stock appreciation. The alternative is to distribute a portion of the profits to shareholders in the form of dividends. Management can also opt to repurchase some of its own shares - a move that would also benefit shareholders.

A company must keep growing at an above-average pace to justify reinvesting in itself rather than paying a dividend. Generally speaking, when a company's growth slows, its stock won't climb as much, and dividends will be necessary to keep shareholders around. This growth slowdown happens to virtually all companies after they attain a large market capitalization. A company will simply reach a size at which it no longer has the potential to grow at annual rates of 30-40% like a small cap, regardless of how much money is plowed back into it. At a certain point, the law of large numbers makes a mega-cap company and growth rates that outperform the market an impossible combination.
In this section, we'll take a deeper look at the different types of dividends and the mechanics of dividend payments; how companies establish dividend policy and the different types of dividend policies; the reasons why companies and investors might prefer higher, lower or no dividend payments; and share repurchases, stock splits and stock dividends as an alternative to cash dividends.

Cash Dividends And Dividend Payment


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RELATED TERMS
  1. Dividend

    A distribution of a portion of a company's earnings, decided ...
  2. Forward Dividend Yield

    An estimation of a year's dividend expressed as a percentage ...
  3. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  4. Accelerated Dividend

    Special dividends paid by a company ahead of an imminent change ...
  5. Dividend Policy

    The policy a company uses to decide how much it will pay out ...
  6. Property Dividend

    An alternative to cash or stock dividends. A property dividend ...
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    Dividends are corporate earnings that companies pass on to their shareholders. There are a number of reasons why a corporation ... Read Answer >>
  3. Can dividends be paid out monthly?

    Find out if stocks can pay dividends monthly, and learn about the types of companies most likely to do so and how monthly ... Read Answer >>
  4. How do dividends affect retained earnings?

    Find out how distribution of dividends affects a company's retained earnings, including the difference between cash dividends ... Read Answer >>
  5. If I reinvest my dividends, are they still taxable?

    Take a brief look at how the Internal Revenue Service taxes different kinds of dividends, including taxation on dividends ... Read Answer >>
  6. Can I receive dividends on ordinary shares of a company?

    Understand the basics of collecting dividend payments on ordinary shares, including when dividends can be paid and under ... Read Answer >>

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