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A dividend payment is an incentive offered by a publicly traded company to attract and maintain investors. Corporations pay dividends to share holders in exchange for a capital investment through the purchase of shares. Dividends are typically paid in cash at regular intervals. Dividends are a portion of company earnings paid to stockholders rather than reinvesting the capital for company growth.
The amount of a dividend payment and the timing of payments is decided by the corporate board of directors. Corporate profits are apportioned at the discretion of the board of directors. Some capital can be retained for business purposes while the remainder is paid to shareholders, usually in the form of cash, but sometimes as additional shares. Some corporations offer a dividend reinvestment plan which applies the cash dividend toward the purchase of more shares. A company may increase or decrease a dividend payment if the business climate changes.
Speculation in stocks that periodically provide a dividend payment will ensure that investors receive a return. Dividend-paying stocks are typically purchased for an established company that is profitable and has an established, free flow of cash. The excess cash can be reinvested for growth and expansion, or it can be paid out to investors as dividends.
Dividends are typically paid monthly or quarterly, with some special dividends paid annually. The dividend yield is a financial ratio that calculates the annual payments relative to the share price. The result is the return on investment for each dollar invested in the company. The dividend yield is a way to compare different dividend-paying companies.
Investors are attracted to companies that pay dividends for two reasons. The first is the current income provided by dividends. The second is that dividends provide evidence of the stability of the company. An investor receiving a periodic dividend payment is assured that the invested capital is in good hands.
Investing in growth stocks is an alternate form of speculation. Growth stocks typically do not pay dividends, reinvesting the excess cash flow into research, development, expansion, or general types of company growth. The investor can realize a return on the investment only through the capital appreciation of the share value.
Diversified investments can be made in dividend paying stocks through mutual funds and exchange traded funds (ETFs). Both of these financial products offer investments focused on current income. The advantage to this type of investment is risk mitigation. Dividend payments by mutual funds are known as distributions. ETF dividend payments vary, but most are paid quarterly.
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