A dividend is the distribution of profits to a company's shareholders.
Earnings that are not retained by a company may be distributed. The
distribution may be in the form of a cash or stock dividend. A company by
paying a cash dividend reduces the financial resources available to it by
the amount of the distribution.
Alternatively, in the case of a stock dividend, there would be more shares
in circulation for the same amount of shareholder equity.
The amount of the dividend is determined every year at the company's annual
general meeting, and declared as either a cash amount or a percentage of the
company's profit. The dividend is the same for all shares of a given class
(e.g. preferred shares). Once declared, a dividend becomes a liability of
When a share is sold shortly before the dividend is to be paid, the seller
rather than the buyer is entitled to the dividend. At the point at which it
is the buyer is no longer entitled to the dividend if the share is sold, the
share is said to go ex-dividend. This is usually a few days before the
dividend is to be paid, depending on the rules of the stock exchange. When a
share goes ex-dividend, its price will generally fall by the amount of the
The dividend is calculated mainly on the basis of the company's
unappropriated profit and its business prospects for the coming year. It is
then proposed by the Executive Board and the Supervisory Board to the annual
general meeting. At most companies, however, the amount of the dividend
remains constant. This helps to reassure investors, especially during phases
when earnings are low, and sends the message that the company is optimistic
with respect to its future performance.
Some companies have dividend-reinvestment plans. These plans allow
shareholders to use dividends to systematically buy small amounts of stock
often at no commission. Dividends are not yet paid in gold certificates
although this idea has been discussed by mining companies such as Goldcorp.
An alternative to dividends is a stock buyback. In a buyback the company
buys back stock, thereby increasing the value of the stock left outstanding.
In recent years this alternative has become more popular in the United
States because investors generally have to pay more in income tax on
dividends than they would in capital gains tax on an increase in the value
of their stock.