What does the dividend give to investors?

Dividends for investors

For the uninitiated, the dividend is a bonus paid out once a year in exchange for holding shares in a given company. The money to be paid out most often comes from the profit earned in the previous year, therefore its amount may vary every year.

What does the dividend give to investors?

If it is paid out annually, it gives an incentive to continue investing in the company. If e. g. every year, an investor would receive 10% of the company’s capital from the investor (much better interest rate than a deposit) than he would have nothing against holding the money.

In practice, a consensus is needed between a strong board of directors and greedy investors. On the one hand, keeping cash in cash at the company’s cash desk will not bring it any additional profits. On the other hand, the payment of too much free capital may threaten the company’s liquidity.

As a general rule, the company should pay out those funds that it will not be able to obtain the desired profitability in the coming year. Simply put it. If the company has earned $1 million last year (and is temporarily waiting in the cash register) and has investment plans for $700,000 at the moment, it should not hold the remaining $300,000 and pay out the dividend better.

Interestingly enough, the company does not have to hold the whole year in order to receive the dividend. Each company shall set one dividend record date. It is enough for the investor to hold the stocks on that day and receive a dividend (the next day it can sell them).

Unfortunately, it is not so pink that we will buy stocks today. Tomorrow we will be on dividend payout and the day after tomorrow we will sell at more or less the same price. The dividend paid is deducted from the stock price. This means that if we buy 1 share at $100 today. Tomorrow we will be entitled to a dividend of USD 10 per stock and the stock price will be adjusted to USD 90. On the third day, of course, we can sell this stock, but by adding it up we spent $100 and will collect $90 + $10 from the dividend. No gain.

What is more, it is. Income tax will be deducted from the dividend paid, so we actually receive less than $10.

That is why it makes no sense to invest in dividends in the short term. Entertainment becomes profitable when we find a company with strong foundations that pays dividends. In such a case, although each payment to investors will result in an initial decline in the value of stocks, good condition will not allow the price to stay low for too long. Another issue is the source of the money paid out.

Everything is in the best order if the company actually pays out the surplus profit of last year. Sometimes, unfortunately, we can encounter companies that generate poor profits and even losses, but still pay dividends. Then the capital comes from reserves or borrowings. Although this is not economically sensible and can seriously harm the company in the long term, the ultimate decision is taken by the majority shareholders.

When analysing the financial report, let us not forget to check whether the company pays dividends and, if so, whether they are relatively constant over the years or variable. Unfortunately, it is difficult to unequivocally answer the question whether dividend companies earn statistically more than the non-payment of dividends.

On the one hand, if the company manages capital surpluses very well, the lack of the need to pay dividends will allow it to grow even faster, which will result in an increase in share prices. On the other hand, the dividend collected over the years is in itself a large amount of capital, which will not even be taken away by us if the stock price falls. As usual, the choice depends on the investor’s preference.

Investing for dividends: