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What is a dividend?

Created on 23 May 2019

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Updated on 16 Oct 2020

A dividend is a share of profits paid to the shareholders and which is earned by a company. The dividend usually refers to the distribution of profits earned by the company. When a company earns profits at the end of the year, then it reinvests a certain portion of it into business to grow it further, which is called as ‘retained earnings.’ The remaining portion is distributed to the shareholders as dividends. 

The dividend can be paid as cash or if used to reinvest in buying more shares of the same company. The board of directors of a company, decide the dividends which are subsequently approved by the shareholders using their right to vote. Various mutual funds and exchange-traded funds also pay dividends just like companies.

At times, many companies still make dividend payments even when they have not earned profits. They do so to carry on with their track record of paying dividends for years together. The dividends can be paid at regular intervals like monthly, quarterly or annually. 

Large and established companies are known to pay good dividends at regular intervals. The following industries pay out good dividends like healthcare, technology, pharmaceutical, cosmetic, petroleum, banks, etc. The companies from developing sectors like biotech and other technology-driven industries may not offer regular dividends as they are still struggling to make their mark in the industry.

Why are dividends paid?

Dividends are paid due to the following reasons:

  • Dividends are paid to ensure trust in the shareholders to stay invested and increase their share of investment in the company. 

  • The company pays dividends to honour the sentiment of shareholders to choose to invest in the company.

  • The dividends are paid to let the shareholders invest their money into buying other variables or financial products. 

  • Companies paying dividends show that the company is growing well and reflects positively on its image.

Earnings from dividends are usually not tax-free, and you may have to appoint a stockbroker to buy dividend-paying stocks. Dividends serve as a great income source in the longer run.

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Koushik Mohan

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Koushik Mohan has completed MBA from National institute of securities markets (SEBI), with 1.6years of experience working with Northern Trust and CA firm in the departments like OTC derivatives and Accounting.

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