There are many people who wish to know how stock dividends work. Dividends are given out by companies to their shareholders when they earn extraordinary profits. The dividends are a way of sharing profits with shareholders who are with the company in its good and bad times.
Stock Dividends
As said above, companies give out dividends to award shareholders from the profits which they earn. Almost all the companies having a big market capitalization and high sales and profits are known to give dividends consistently to their stock holders. Though it is not binding to give a certain percentage of dividend every year, companies try their level best to keep their shareholders satisfied by issuing them. The dividends can also help companies to retain and improve their reputation in the stock market as an investor and trade friendly stock. Generally, it has been observed that firms with very fewer profits are not consistent when it comes to giving out dividends. This is because the inconsistent cash flows, small cash in hand, fewer order flow, high debt which causes outflow of interests to banks and financial institutions, and low profits make it almost impossible for them to give dividends.
We all know that the stock market is very volatile. Millions of shares of companies are bought and sold in a single stock trading session. So, whom should a company give the dividend as shares are exchanged very frequently? To decide this, it is essential for the company to identify the true owners of the stocks. For this, the company declares a record date and at many places, it is required that you own the shares in the company on this particular date. In fact, you will have to complete your trade in this stock around three days prior to this record date.
So, all those investors who qualify for the dividend finally receive it directly into their accounts. It is important to understand that dividend is an amount which is paid per share. The amount which is to be paid to all the shareholders per share or the dividend payout ratio is decided by the board of directors by taking into consideration the financial position of the company. The company management would never want to stretch or put a strain on their finances to give out dividends. Dividends are declared only when the firm has cash surplus. This is why many technical analysts and stock investment counselors of the stock market, advise investors to invest in stocks that pay dividends. However, if you end up buying shares just for the sake of dividends in a bad company, you may be at loss even if you get the dividend because the market price of such stocks can decline steeply in market crashes. Now, should dividends be taxed? This has always been an issue of large-scale debate. Many people believe that since the companies pay taxes on their profits, there is no need to tax the dividends. Also, there are some others who are in favor of taxing dividends.
Hopefully, after reading this article, you must have definitely understood how dividends work. Here is where I would like to sign off by hoping that you will research well before making any investments.
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