What are Dividends?

Dividends are payments a company makes to share profits with its stockholders. Dividend refers to a reward, cash or otherwise, that a company gives to its shareholders. Dividends can be issued in various forms, such as cash payment, stocks or any other form. A company’s dividend is decided by its board of directors and it requires the shareholders’ approval. However, it is not obligatory for a company to pay a dividend. Dividend is usually a part of the profit that the company shares with its shareholders.

After paying its creditors, a company can use part or whole of the residual profits to reward its shareholders as dividends. However, when firms face cash shortage or when it needs cash for reinvestments, it can also skip paying dividends. When a company announces dividend, it also fixes a record date and all shareholders who are registered as of that date become eligible to get dividend payout in proportion to their shareholding.

Dividends are paid on a regular basis, and they are one of the ways investors earn a return from investing in stock. A dividend is paid per share of stock, if you own 30 shares in a company and that company pays Rs.10 in annual cash dividends, you will receive Rs.300 per year.

But not all stocks pay dividends, if you are interested in investing for dividends, you will want to specifically choose dividend stocks.

Difference between Dividends and Bonus

  • Dividends are paid in cash, while bonus issues are paid in the form of additional shares.

  • Dividends lead to fall in market capitalization, while Bonus issue keeps the market cap intact.

Similarities between Dividends and Bonus

  • Both are means to distribute profits with shareholders.

  • Both are issued out of the General Reserve of the company

  • Both result in a fall in share prices of the company.