Company dividends are shares of a company's profits that are distributed to people who hold stock in the company. They are usually paid out on a scheduled basis, although a company may opt to pay a special dividend if it experiences unprecedented earnings or other unexpected events. For investors, company dividends provide an incentive to invest in a company and to continue to hold those investments rather than selling them.
Companies are not required to pay out dividends, and not paying dividends does not necessarily mean that a company is not profitable. When companies determine their profits over a quarterly, annual, or biannual period, they must decide on the most effective use of those profits. In some cases, reinvestment into the company to allow it to grow may be a better choice than paying out company dividends to shareholders. Thus, rapidly growing companies rarely provide payouts to shareholders, while more established companies with a slower growth rate can afford to distribute some of the profits.
Once a company determines that dividends will be paid out, it makes an announcement that dividends are being distributed and provides information about the form of the payment and the amount. The date of the announcement is known as the declaration date. Once declared, the dividends become a liability for the company and it must process the payments within the time frame discussed in the announcement.
Typically, company dividends are provided in the form of cash payments. However, companies can also offer stock, credit, or property as a dividend. Cooperatives, for example, often prefer to offer credit to their shareholders rather than making cash payments. Stocks can be potentially be advantageous for growing companies that want to reward their investors, but also want invest their capital in new initiatives.
In addition to being a source of benefits to shareholders, company dividends can also provide important information about the health of a company. Records about dividends paid out are publicly available and can be used by investors to research a company. A common metric used is the dividend yield, determined by dividing the average dividend per share over the current share price. However, the yield must be considered in the context of other information. If companies have a poor dividend yield, it may mean that they are growing or that they are not doing well. Conversely, a high yield is not necessarily a good thing, as it may mean that the company has undervalued stock.