Dividends are the portion of the earnings of a corporation distributed to shareholders. Distributions are usually made on a quarterly basis according to the dividend policy of the company. This payment is commonly made in cash and investors may either take the dividend distribution in cash or reinvest the money to purchase additional stock in the company. Some companies do pay dividends as stock as opposed to cash, but this is much rarer.
When a company provides dividends, it is giving individuals and added incentive to purchase company stock even during times the company is not growing. Large, small, mature, and young companies pay dividends to shareholders as a form of return on investment. In general, companies that have dividends have moved beyond the growth phase and do not experience significant benefits from reinvesting profits. They instead decide to pay this money out to shareholders to make the investment more appealing.
An increase in demand for a stock will cause the stock price to increase, a welcome situation for the company. If investors are drawn to a stock that pays a nice dividend, this may be the result. These dividend payments provide investors with a consistent return on an investment that is considered low risk. Investors can purchase shares of a stable, low growth company and know that the value of this initial investment will most likely not drop substantially.
The investors profit from the dividend payments and as the company grows, so can the dividends. This growth in dividends provides the investor with additional value for the investment made. Investors may engage in practices that capture dividends by making stock purchases after the dividend is announced and selling the shares for the same price after the dividend is received. This practice is risky because the stock price tends to adjust itself immediately after the dividend payout has been made.
Dividends are a convenient way for a company to attract investors and eventually cause share prices to increase. A company pays a portion of its excess earnings to investors on a regular basis in the form of either cash or company stock. Investors can rest assured that they will profit from their investment even when the company is not growing. The existence of dividends is usually a win-win situation for both investors and the company.
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