Dividend is a portion of company's earning distributed to the shareholders, declared by the board of directors. Normally dividend is quoted in cents and dollars. Dividend can be quoted in other form besides cash, such as scrip dividend (form of shares), or optional dividend (between cash and shares).
Why does board of directors decide to distribute dividend to the shareholders?
Board of directors will analyse a few aspects before deciding to distribute dividend to the shareholders:
Financial balancing, to balance between the cash needed to support daily business operation, current & future growth of the company, and to reward the shareholders:
- Current growth and future growth: the board of directors will work out the projected amount of cash needed for current business plan, future expansion including any merger & acquisition and organics growth.
- Daily operation of the business: operating cash flows/operating expenditure (Opex)
- Capital expenditure (Capex): any purchasing of assets/machinery & equipment, R&D
- Financial obligations if any (short term & long term debts)
When the board of directors have done a detailed analysis of the above, and they have concluded that the cash portion is no longer benefit sufficiently by reinvesting their profits, they will usually distribute the excess cash to their shareholders in form of cash dividend (payout).
Companies that pay regular dividend to their shareholders (quarterly, half yearly, or yearly) usually (but not always) receive a higher valuation and better appreciation from the investor. But it is provided the dividend payout duration is there for at least 5 years and it is increasing in a stable growing payout rate.
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