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A companyissues stock essentially to raisecapital. The stock price is based upon the total market value of
the company divided by the total number of shares issued. If a company posts a profit that is in-line with
expectations and company forecasts, then the price of the stock will remain constant as those profits were
already built into the price of the stock. If the company fails to meet profit forecasts, then stock prices will
fall and investors will lose money. Obviously, investors
are looking for companies that will actually outperformmarket expectations as this will drive stock prices, and profits, higher.
Therefore, the share price of a stock should be higher at the end of the year than at the beginning - at least this
is the case with sound investments. Such situations allow an investor to make capital gains when they sell the
stock. However, until the stock is sold, there will be no potential for profit - unless the company decided to issue a
dividend.
Dividends are not paid out by all public corporations. Indeed, it is generally the practice of more established and
larger businesses to issue dividends as a means of encouraging investors to hold on to their stock.
This in turn helps keep the share price more stable as fewer shares are changing hands. The only time people tend
to sell off their stock is right before or after it begins to crash. Dividends discourage nervous investors from
throwing away their dividend payouts when the stock tumbles a little.
Dividends are determined by the company who issued the stock and they may fluctuate greatly. Dividends are cash payments
that the company pays to stock holders based upon profits and are paid out on a per share basis. In other words, a
business may determine that the dividend payout to stockholders for the first quarter is $.25 per share. So, a person
who owns 1000 shares would receive a dividend payment of $250 for the first quarter.
The great thing about companies who issue stock with dividend payouts is that the stock is still owned after
the payout. This means that dividends provide a revenue stream and the stock can still be used for potential capital
gains at some point in the future. However, dividends are not paid out unless the person has held the stock for a
certain amount of time. Where stock dividends are concerned, there are two important dates to remember:
"Record Date", and "Ex-Dividend Date."
The Record Date is determined by the company that issued the stock. While governed by company protocol and by-laws,
the Record Date is set by the issuing company of the stock and is the date on which a person must have been recorded
as a shareholder in order to receive the dividend. For businesses whose stock typically pays dividends, the Record Date
and its method for
determination should be available for review prior to stock purchase. The Record Date is also used
to determine who is sent proxy and financial statements as well.
The Ex-Dividend date is not determined by the company issuing the stock. Instead, this date is actually set by the stock
exchanges after the companies have determined the Record Date. While not always the case, common practice is for the
Ex-Dividend Date to precede the Record Date by 2 business days. If you bought the stock on the Ex-Dividend Date or at
any point afterwards, then you will not receive the dividend. Instead, the dividend will be paid to whoever owned
the stock previously. You can tell when a stock has gone Ex-Dividend because it will have an 'X' next to it in the
papers.
Just as there are different types of stocks, there are also different kinds of dividends. While stocks basically come
down to either common or preferred, dividends have three general varieties: cash, percentage cash, or stock.
Cash Dividends
Without question, cash dividends are the most common and the type of dividends most investors are looking to receive.
The dividend amount is determined by the issuing company of the stock and then paid out on a per share basis.
Multiply the dividend amount by the total number of shares to determine the total cash payout for that company’s
stock (see above example).
Percentage Cash Dividends
The issuing company of stock has a lot of options, including what to set the par value at. The parvalue is determined
when the stock is issued and it does not change unless there is a stock split. The par value can be found on the stock
certificates themselves and is used to help determine payment amounts when percentage cash dividends are calculated.
The percentage is announced by the company and is based upon profits for a set period of time (usually quarterly,
but may be annual).
Multiplying the par value of the stock by the percentage given by the company will produce the cash dividend payout
on a per share basis. The total cash payment would be determined by the total number of shares owned by the investor.
For example, a person owning 100 shares with a par value of $2/share might learn that the company was paying a cash
dividend percentage of 10 percent. Therefore, the dividend per share would be $.20, or 10 percent of $2. The total cash
payment for this investor would be $.20 multiplied by 100 shares, or $20.
Stock Dividends
A company may not always be interested in rewarding current investors with cash dividends. Recall that one of the
motives behind offering dividends to investors is to motivate them to hold on to the stock and therefore keep
stock prices more stable (a lot of market trading can have adverse effects upon individual share prices
of
company stock). However, sometimes the company actually wants to drive the per share price of the stock down while
not affecting the overall market value of the business. This happens when a company needs to attract new
investors - and lowering the per share cost of stock tends to do just that. In such cases, stock dividends may be
offered in lieu of cash.
Indeed, no cash changes hands when stock dividends are paid to investors. Instead, more shares of the company will
be given to an investor. This will not actually affect the total percentage of the company owned by the investor.
It will, however, increase the total number of shares available. While the total market value of the company will
remain the same, the share price will decrease because more stock is available.
This should stimulate new investments in the company as this strategy is generally only used by successful companies
in need of fresh sources of capital. Consistently highperformance will drive up stock prices unless the stock is split
or new shares are issued. The higher the per share cost of stock, the harder it will be to attract new investors.
This desire to lower stock prices without affecting market value is very much the same motivation behind stock splits.
Investors tend to like stock dividends, at least when companies are performing well above market expectations.
An investor who owned 1000 shares before the stock dividend and 1100 afterwards may indeed still have the same amount
of money.
If the price of the stock was $50 before the dividend and $45 afterwards, they would still have roughly $50,000.
The difference is that when the day ends with the stocks up 0.25 pts, instead of a profit of $250, there would be a
profit of $275. It may not seem like much at first, but that extra stock would add up quickly.
In the long run, stock dividends are more profitable for investors - all other factors being equal.
While people can purchase stock with the hopes of "cashing out" someday when they pick a long-shot and therefore
take the capital gains approach to investing, they can also take the revenue stream approach as well.
Dividends are not paid on all stocks but they are generally offered as incentives by many of the larger, more
established businesses. They are paid out as a percentage of profits with cash and stock dividends being the two
principle forms of compensation.
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