A dividend is a portion of the profits of a corporation that is distributed, in cash, among its shareholders, generally periodically. It is one of the ways in which the firm rewards, in cash, each partner in proportion to their participation in the capital of the company.
It is the final element of what is known in financial administration as a policy of payments, benefits or dividends, which is important because it projects the firm's solidity in the market, in addition, it is self-financed through it, at the same time as seeks to maximize the wealth of its shareholders.
Below is a list of definitions, from bibliographic resources, that will help you better understand this element.
Payment policy
Decisions that a company makes about whether or not to distribute cash to shareholders, how much to distribute and through what means. (Gitman and Zutter, p.507)
The dividend policy is part of the financing decisions of companies. It consists of establishing the appropriate allocation of profits between dividend payments and additions to the retained earnings of the companies. (Van Horne and Wachowicz, p.462)
Cash dividend
Sum of money that is distributed to the holders of shares of, taken from retained earnings. A company has the right, but not the obligation, to distribute dividends from the profits it has accumulated during a period of operation. (Simanovsky, p.113)
Cash dividends represent an outflow of money from the firm to the shareholders. For accounting purposes, they are reflected as a decrease in assets in the cash and equivalents item and in equity in the retained earnings item. (Bebczuk, p.87)
Repurchase of shares
It consists of the repurchase of shares by the issuing firm on the open market or through a self-purchase offer. If a company has excess cash and insufficient profitable investment opportunities to justify the use of these funds, it may be in the interest of the shareholders to distribute the funds. This distribution can be achieved by repurchasing shares, or by paying the funds in higher dividends. Without personal income taxes or operating costs, in theory the two alternatives give the same to shareholders. With the buyback, few shares are left outstanding, increasing earnings per share and, basically, dividends per share. Therefore, the market price per share will also increase. In theory,the capital gain from the repurchase will equal the dividends that would have been paid anyway. (Van Horne and Wachowicz, p.510)
It is conceptually equivalent to a cash dividend, its accounting reflection is a reduction of the same magnitude in the cash and equivalents item and in the capital item. (Bebczuk, p.87)
Dividend in shares
A stock dividend is the payment of a dividend in the form of shares to existing owners. Companies often pay stock dividends as a form of replacement or supplement to cash dividends. In a stock dividend, investors simply receive additional shares in proportion to the shares they already own. No cash is distributed and no real value is transferred from the business to investors. Instead, as the number of shares outstanding increases, the price of the shares decreases roughly in proportion to the amount of the dividend in shares. (Gitman and Zutter, p.525)
Stock dividends are nothing more than a mirage, since the shareholder receives new shares but no cash. The accounting transaction consists of a reduction in retained earnings and an equal increase in the capital item. (Bebczuk, p.87)
Dividend yield
According to Brun (p.77), it is one of the components of the overall profitability for the shareholder, the other component being the capital gain or loss generated at the time of the divestment (sale). The higher the dividend yield, the better for the shareholder.
But it must be borne in mind that the shareholder (investor) receives its profitability in two ways: via dividends and via capital gains or losses; if an investor has a preference for a Yield (dividend yield) present and future (expected) higher than the rest.
Dividend yield is not useful for "growth" companies because the dividend they usually pay is negligible, as they tend to prefer to reinvest the profits in the business rather than distribute them as a dividend.
Dividend payment ratio (pay-out)
Following Brun (p.77), this ratio, expressed as a percentage, is an indicator of the company's self-financing and dividend distribution policy.
Pay-out = Dividend per share (DPA) / Earnings per share (EPS)
Indicates the percentage of every dollar earned that a company distributes to owners in the form of cash. (Gitman and Zutter, p.523)
Establishes the amount of profits that can be retained in the companies as a source of financing. (Van Horne and Wachowicz, p.462)
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In the following video, the dividend is clearly defined and other concepts such as dividends are synthesized: single, interim, complementary and extraordinary.
Bibliography
- Brun, Xavier; Elvira Benito, Oscar and Puig, Xavier. Equity market and currency market. Profit Editorial, 2008.Bebczuk, Ricardo N. Asymmetric information in financial markets. AKAL Editions, 2000. Gitman, Lawrence J. and Zutter, Chad J. Principles of Financial Management. Pearson Education, 2012 Simanovsky, Shlomo. Accounting for Beginners. Global Finance School, 2011. Van Horne, James C. and Wachowicz, John M. Fundamentals of Financial Management. Pearson Education, 2002.
