What is a Dividend Payout & How are Dividends Paid? | Gainy (2024)

What is a Dividend?

A dividend is a total amount or amount per share that a stock corporation pays to its shareholders. That's how dividends are explained.

Most publicly traded corporations do not distribute all of their profits to their owners or shareholders, but only a portion of them (e.g., a 60% distribution ratio). The amount of the dividend is determined by the general meeting of shareholders.

Types of dividends by form of distribution

• Share dividends. This term comes from the English word "share.” If a shareholder receives their share of profits in stock dividends, they do not receive any cash. Instead, they receive their profits in the form of additional shares in the company.

This is a way for companies to save cash for other purposes. If a company is growing rapidly and expects high profits, a high dividend on the shares may be advantageous. This form of profit distribution is also known as "bonus stock" or "bonus shares" if the shares paid out are owned by the same company. If additional shares are issued as dividends, this is also known as a "stock split.”

• Cash dividends. This is a direct distribution of profits to the account of the respective shareholder. The amount of profit each shareholder will receive per share is determined in advance.
• Dividends in kind. In this case, shareholders receive a distribution in the form of tangible assets. The range here is vast. "Tangible assets" can be, for example, shares in subsidiaries as well as tangible goods such as cars or products produced by the company.

Types of dividends by frequency of payment

In terms of frequency of payment, shareholder dividends are divided into three types:

• annual type;
• semi-annual;
• quarterly.

Because of this classification, many shareholders who missed the deadline for closing the registers but know how often dividends are paid do not worry too much because many organizations issue dividends throughout the reporting year. Nevertheless, you should always keep a close eye on the articles of association and control the timing of payments.

Types of dividends by size

In terms of size, dividends can be classified as:

• full one-time payment;
• partial payments.

In the first case, the entire amount is paid to the recipient; in the second case, the payment is made in installments. The amount paid in full is a lump sum, while partial payments are usually made in several stages during the accounting year. Understanding this will help you understand how dividend payments work.

Types of dividends by type of stock

Dividends are also classified by stock type.

• Dividends on preferred stock are worth a lot more; this is stated in the organization's charter.
• Common stock is valued by directors at separate meetings. Preferred stock owners have several advantages because they own a percentage of the profits of the entire organization.

Types of dividends according to the method of settlement

There are monetary types of settlement and dividends in the form of the ownership of the organization. As for the property, dividends are paid in the form of company shares. This phenomenon is widespread in foreign companies.

How are Dividends Paid to Shareholders?

Do you want to know when stocks pay dividends? The order of payment of dividends can be quite different — they can be paid annually or once — it all depends on the particular case. Payments affect capitalization or, to be exact, reduce it. If dividends are paid before the end of the reporting year, they are called interim dividends. Dividends paid at the end of the year are called final dividends.

Dividends are usually paid in cash, but they can also be paid in stock or property. Therefore, dividends come in either cash or stock dividends.

How do dividends work? Let’s review a case study.

Dividend distribution example

The share capital of Meier AG is €1 million and is divided into shares with a par value of €1 each (hence, there are 1 million shares).

In the fiscal year 2018, Meier AG made a profit (net profit after taxes) of €2,000,000.

As in previous years, 60% of this amount (payout ratio) will be distributed to shareholders as dividends.

This is proposed at the annual general meeting (AGM), and if it accepts the proposal, the dividend is usually paid the day after the AGM.

If, for example, the board of directors and supervisory board have already made a partial distribution of profits, the distribution will not be made from the annual surplus but from retained earnings.

Calculation and dividend check

The total amount of the distribution will be €1,200,000 (60% of €2 million).

A dividend of €1.20 (€1,200,000/1,000,000 shares) is paid on each of the 1 million shares. Thus, a shareholder owning 50 shares in Meier AG receives a gross dividend (usually tax-free) of €60.

A private shareholder (or GmbH owner) must pay 25% income/capital gains tax (€15) plus a solidarity fee (5.5% of €15 = €0.825) on top of the gross dividend. Thus, the net dividend reaches €44,175.

What happens to the remaining 40% of retained earnings?

The remaining €800,000 will be retained (retained earnings through transfer to income reserves) and will be used to finance the company itself (e.g., it can be invested in new machines or generally in the further growth of the company).

When Does a Company Pay Dividends?

When do dividends get paid? It depends on the policy of the issuer. Typically, security holders receive income from 1 to 4 times during 12 months. Many U.S. companies, such as Apple, prefer to set the stock dividends payment date every 3 months.

Timing of distributions on common and preferred shares

The frequency of distribution of income to investors depends on the type of security. Dividends on preferred securities are usually paid at the end of the reporting year, while dividends on common securities are paid quarterly or every 6 months.

How many days after the cutoff are dividends paid?

If the shares are the investor's own funds, the dividend will arrive in a brokerage or bank account within 25 days after the cutoff. Dividends on preferred stock are usually paid first.

If the stock is purchased with borrowed funds (on margin), the timing may be different from usual.

Warning. The payment of profits to depositors results in a dividend gap. Investors at this point are not interested in buying shares of the issuer at a high price, so the quotes fall sharply. But the value of securities of reliable companies usually quickly returns to previous values.

What to Do with Dividends Next

Now you know how often stocks pay dividends. But what to do next? After dividends are paid, each shareholder decides for themselves how to manage them. They can be spent for any purpose, but it is more effective to reinvest the money to maximize profits.

Some investors are seriously concerned about whether it makes sense to reinvest dividend payments or whether it is better to spend income on their own needs.

It turns out that regular dividend investments in stocks result in higher returns by the end of the investment term. The difference is especially noticeable over a long time horizon.

According to analysts' calculations, the yield on securities, taking into account reinvestment, can be more than 1.5 times higher than the yield on the same assets when dividends are simply accumulated.

Such a result is explained by the fact that after each dividend payment and reinvestment of income, the number of shares in the investor's portfolio increases. The next time an even larger amount of dividends is received and reinvested from the increased number of shares. As a result of reinvesting, the yield grows like a snowball, and you become not only the owner of more and more shares but also the recipient of more and more dividend income.

IMPORTANT: Dividend reinvestment should be doubled if the company's stock price starts to decline. On the one hand, this can be a good time to buy the cheaper securities of a stable company, but on the other hand, it can lead to significant losses if stock prices don't recover.

Final Thoughts

We’ve covered the question of how to get dividends from a stock, discussed when companies pay them out and what it depends on. And most importantly, you should now realize that reinvesting dividends is a great way to raise capital.

What to do next? Get more knowledge. You already know how stock dividends work, and that's great, but don't stop. Download the Gainy app right now and access the most important and valuable information for any investor.

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