Day 142 Dividends

Dividends

As a financial investor, we are familiar with the term ‘dividend’, since it is the main source of return on share investment besides the capital gain. It is defined as a series amount of cash inflow, which depends on the company’s profit. It is an important figure for investors to assess the value of the company's stock, because there are several key indicators is calculated beyond the dividend payment. For instance, financial decision makers evaluate the return on their investments through Earnings Per Share(EPS) and Price to share(PE). The ‘earnings’ of a stock is actually the dividend distribution from the entity. So it is also very common for investors to establish the stock valuation model according to the dividend payments' pattern. However, the payment of dividend is not an obligation for the company, thus ordinary share holders may not receive the expected return. In addition, addition, the rules of dividend payment can be complicated for new investors, so I would like to provide a brief introduction of the dividend distribution process. 

The dividend payment generally is not compulsory for a corporation, hence a different class of shares is developed to satisfy those who mainly interested on consistent income stream. These preference shares holders give up some rights such as voting in the general meeting in exchange of the priority and fixed claim on the dividend. The preference shares can either be cumulative or in-cumulative on its feature. Where cumulative preference shares will have the priority rights to be paid on arrears dividend and the dividend for the current financial period. On the other hand, the ordinary share holders will not have guaranteed dividend return on their investments. Therefore, it all depends on the management's decision. If the board has decided to make such payment, they will announce an official notice to investors. The declaration consists of the date, amount and other relevant information about the distribution. The most crucial information provided on this notice is the record date and value of the dividend. As we understand, the dividend is allocated through a pro rata method, which is based on the retained earnings of the entity. In order to determine who is entitled to the payment, the company will close the share register on the recording date and review its shareholder’s list. However, we cannot simply purchase the stock before the record date to pursue the dividend return, due to the ex-dividend date is involved. It is normally two business days before the record date, and all investors who hold the company’s shares before this date are entitled to the dividend. So if someone purchased the stock on the ex-dividend date, the payment will be distributed to the previous owner instead of him. We should comprehend this process, because the price of the shares will drastically rise before this date and drop when it arrives. At last, the dividend will be paid to shareholders in forms of cash or proportions of shares.