What are Dividends and how do they work?

What are Dividends and how do they work?

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Dividends are a payment a company makes to share profits with its shareholder. A shareholder of a corporation is an individual or legal entity that is registered by the corporation as the legal owner of shares of the share capital of a public or private corporation. Shareholders may be referred to as members of a corporation.


What Are Dividends?

Simply put, dividends are the portion of profits that a business distributes to its shareholders according to the dividend declaration rules in Singapore. They represent a reward to shareholders for believing in the company’s long-term success. A company can pay the following types of dividends to shareholders:

· Cash. A company can pay dividends by depositing cash into the brokerage account of its shareholders.

· Special dividends. A company shares special dividends from the excess cash it has on hand. It can only issue such dividends outside of its regular policy.

· Stock dividends. A company can also pay investors in the form of additional stocks.

· Dividend reinvestment programs (DRIPs). Shareholders can reinvest dividends back into the company's stock through DRIPs, often at a discount.

· Preferred dividends. A company can either issue preferred stock or common stock to its shareholders. One of the advantages of owning preferred stock is that a company generally pays dividends on it quarterly. However, preferred stock dividends tend to be fixed, while dividend payouts on common stock can change with every payout.

A company can only pay dividends if it made a profit, which means that it cannot distribute dividends if it made a loss. The company’s directors can be liable for both criminal and civil liabilities if the government found that it paid out dividends from a loss.


When Are Dividends Paid?

A dividend is paid per share of stock, for example, if you own 30 shares in a company and that company pays $2 in annual cash dividends, you will receive $60 per year. Dividends are usually paid quarterly, though some companies do pay monthly or even semi-annually. This depends on the board of Directors as they must approve each dividend payment, when it should be paid and the ex-dividend date.

An ex-dividend date is extremely important to investors, this indicates when investors must own the stock by to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. This is also important to investors who sell the stock after the ex-dividend date, as they will still be eligible to receive the dividend, because they owned the shares as of the ex-dividend date.


Should I pay dividends?

Dividends are typically declared by larger, well-established corporations rather than start-ups because they are more financially secure and comfortable. Whereas, for start-ups and small businesses, these funds are typically reinvested in order to improve business processes.

However, dividends can only be paid out of a company’s profits so one should ensure that the company is faring financially well before deciding to issue dividends. A wrong declaration of such payments when there are insufficient profits may subject directors to both criminal and civil liabilities under Section 403(2) of the Companies Act.


Why Pay Dividends?

This is done to encourage shareholders to keep their shares and continue supporting the company. When a company pays its shareholders on a consistent and regular basis, the shareholders perceive the company to be powerful and financially wealthy, with excellent business performance. This attracts more investors looking to profit to purchase the company's stock, causing the stock price to skyrocket.


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