Dividends are corporate profits paid out to company stockholders. Dividends are declared by the board of directors and are typically paid quarterly, but there are several exceptions in which dividends can be paid more or less often.
Dividends are at the sole discretion of the board of directors, which can increase, reduce, suspend or eliminate them at any time.
Most companies that pay dividends do so because they have strong predictable cash flows and do not need to reinvest all the profits back into the business. These are typically large, established businesses with limited growth prospects. However, some companies are cyclical, making substantial profits in some years and little or no profit in others. Such companies may elect to pay out some of their profits in dividends in a good year while paying little or no dividend in a bad one.
Under special circumstances, such as the sale of a subsidiary or a lawsuit or an insurance settlement, a company may elect to pay a special one-time dividend. Dividends are typically paid in cash but a company may also pay a stock or a property dividend. A stock dividend is paid in shares of company stock. For example, a shareholder may receive five new shares for each 100 shares he owns. A stock dividend such as this may be paid quarterly or constitute a one-time event. A property dividend is typically a one-time event in which a company spins off a subsidiary to the existing shareholders in the form of stock in the newly-formed company.
Most mutual funds pay dividends quarterly but some mutual funds and closed-end funds pay monthly dividends. Mutual funds are investment companies organized for the purpose of obtaining investment income from portfolio securities – stocks and bonds – that they buy with investor money. Most bonds pay interest semiannually and most stocks pay dividends quarterly but on different months of the year, so a fund typically receives some investment income – interest and dividends – every month. Some funds average out the estimated annual income and pay it out in substantially equal monthly installments.
- “PassTrak Series 7: General Securities Representative License Exam”; Dearborn Financial Services; 2003