Stock dividends are payments that are made by a company to its shareholders, usually on a quarterly basis. It is typically the portion of the company’s profits that have been designated to be paid out to stockholders in the form of cash distribution or dividend yield. When a company earns a profit or has a surplus at the end of the year, the money paid as quarterly dividends can be used in two ways; it can be used to be re-invested back into the company as retained earnings or the surplus can be paid out in the form of dividends. In the case of joint stock companies, quarterly dividends are paid in a fixed amount according to share. In this way, a shareholder will receive quarterly dividends in direct proportion with the amount of shares they hold. Joint stock companies do not classify dividends as expenses; dividends are classified as after tax profits among the various shareholders.
Quarterly dividends are usually paid out in the form of a cash distribution or shares in the company. In some rare cases, quarterly dividends paid as store credits. This is more common among retail consumer cooperatives because cooperatives allocate quarterly dividends according to the activity of members and in this way, their quarterly dividends are often considered a pretax expense. Many public companies and stock brokerages offer quarterly dividend reinvestment plans. These plans automatically utilize the cash from the quarterly dividends to purchase additional company shares.
Cash Distributions for Stockholders
Cash distribution of dividends are paid out in a form of currency. The cash distribution is usually paid via an electronic finds transfer or less commonly in the form of a paper check. Cash distributions are considered to be a form of investment income and are subject to taxes within the year they are paid. Cash distribution is the currently the most common method of distributing company profits its shareholders. For each share owned, there is a specific amount of money that is distributed and this is often due to the dividend yield. So in this case, if a person owns 50 shares and the cash dividend happens to be $1.00 per share, the stock holder will be paid $50 as their cash distribution.
Calculating the Dividend Yield
A dividend yield is a way stockholders are able to measure how much their cash distribution will be for each dollar that was invested in an equity position. A dividend yield are an indication of how much bang investors get for their buck and how much their cash distribution and dividend yield will be. Many investors require a minimum stream of cash distribution in their investment portfolio. This can often be accomplished by choosing to invest in stocks that pay a stable dividend yield. For example, if two companies pay the same amount of annual dividends but the other company is trading at a higher amount but the dividend yield is lower, the investor will likely choose to purchase the stock with the higher dividend yield because their cash distribution will be larger. Dividend yield is an attractive component for all considering trading in the markets.