DEFINITION of 'Dividend'

A dividend is a distribution of a portion of a company's earnings, decided by the board of

directors, to a class of its shareholders. Dividends can be issued as cash payments, as
shares of stock, or other property.

BREAKING DOWN 'Dividend'

The dividend rate may be quoted in terms of the dollar amount each share receives
(dividends per share, or DPS), or It can also be quoted in terms of a percent of the current
market price, which is referred to as the dividend yield.
A company's net profits can be allocated to shareholders via a dividend, or kept within the
company as retained earnings. A company may also choose to use net profits to
repurchase their own shares in the open markets in a share buyback. Dividends and
share buy-backs do not change the fundamental value of a company's shares. Dividend
payments must be approved by the shareholders and may be structured as a one-time
special dividend, or as an ongoing cash flow to owners and investors.
Mutual fund and ETF shareholders are often entitled to receive accrued dividends as
well. Mutual funds pay out interest and dividend income received from their portfolio
holdings as dividends to fund shareholders. In addition, realized capital gains from the
portfolio's trading activities are generally paid out (capital gains distribution) as a year-end
dividend.
The dividend discount model, or Gordon growth model, relies on anticipated future dividend
streams to value share

Companies That Issue Dividends

Start-ups and other high-growth companies such as those in the technology or
biotechnology sectors rarely offer dividends because all of their profits are reinvested to
help sustain higher-than-average growth and expansion. Larger, established companies
tend to issue regular dividends as they seek to maximize shareholder wealth in ways aside
fromsupernormal growth.
Companies in the following sectors and industries have among the highest historical
dividend yields: basic materials, oil and gas, banks and financial, healthcare and
pharmaceuticals, utilities, and REITS.

Arguments for Issuing Dividends

The bird-in-hand argument for dividend policy claims that investors are less certain of
receiving future growth and capital gains from the reinvested retained earnings than they
are of receiving current (and therefore certain) dividend payments. The main argument is
that investors place a higher value on a dollar of current dividends that they are certain to
receive than on a dollar of expected capital gains, even if they are theoretically equivalent.
In many countries, the income from dividends is treated at a more favorable tax rate than
ordinary income. Investors seeking tax-advantaged cash flows may look to dividend-paying
stocks in order to take advantage of potentially favorable taxation. The clientele
effect suggests especially those investors and owners in high marginal tax brackets will
choose dividend-paying stocks.
If a company has a long history of past dividend payments, reducing or eliminating the
dividend amount may signal to investors that the company could be in trouble. An
unexpected increase in the dividend rate might be a positive signal to the market.

Dividend Payout Policies

A company that issues dividends may choose the amount to pay out using a number of
methods.

Stable dividend policy: Even if corporate earnings are in flux, stable dividend
policy focuses on maintaining a steady dividend payout.
Target payout ratio: A stable dividend policy could target a long-run dividend-toearnings ratio. The goal is to pay a stated percentage of earnings, but the share
payout is given in a nominal dollar amount that adjusts to its target at the earnings
baseline changes.
Constant payout ratio: A company pays out a specific percentage of its earnings
each year as dividends, and the amount of those dividends therefore vary directly
with earnings.
Residual dividend model: Dividends are based on earnings less funds the
firm retains to finance the equity portion of its capital budget and any residual profits
are then paid out to shareholders.

Dividend Irrelevance
Economists Merton Miller and Franco Modigliani argued that a company's dividend policy is
irrelevant, and it has no effect on the price of a firm's stock or its cost of capital. Assume, for
example, that you are a stockholder of a firm and you don't like its dividend policy. If the
firm's cash dividend is too big, you can just take the excess cash received and use it to buy
more of the firm's stock. If the cash dividend you received was too small, you can just sell a
little bit of your existing stock in the firm to get the cash flow you want. In either case, the
combination of the value of your investment in the firm and your cash in hand will be exactly
the same. When they conclude that dividends are irrelevant, they mean that investors don't
care about the firm's dividend policy since they can create their own synthetically.

It should be noted that the dividend irrelevance theory holds only in a perfect world with no
taxes, no brokerage costs, and infinitely divisible shares.

DEFINITION of 'Dividend Per Share - DPS'

The the sum of declared dividends for every ordinary share issued. Dividend per share
(DPS) is the total dividends paid out over an entire year (including interim dividends but not
including special dividends) divided by the number of outstanding ordinary shares issued.
DPS can be calculated by using the following formula:

D - Sum of dividends over a period (usually 1 year)

SD - Special, one time dividends
S - Shares outstanding for the period