Investing has multiple benefits, provided you get it right. Over time, the stock market has evolved to accommodate individuals with a vast variety of investing ability and risk appetite. If an investor is able to take a igood trade, they could potentially turn a profit on that stock when they sell it. However, the ability to sell at a higher rate than which it was purchased in order to turn a profit is not the only benefit investors and traders get from their stock. Some companies also give out what is known as dividend payments. Given out in a number of ways, such as cash dividend or additional stock, dividend gives investors incentive to hold the stock they invest in, contrary to selling it off at a higher rate. This article will explore the concept of dividends and cash dividends.
What are dividends?
Dividend payments are in essence, a share of the profit a company makes that is given out to shareholders of that company. While one might assume this only means those who are owners and majority investors in the company, however it is quite the opposite. When you purchase stock, you give the company a given amount of funds in return for stock, or a small part of the company. Therefore, buying even a single share makes you a percentage shareholder of the company, and eligible for dividend payments. Most companies do not give out dividend payments frequently, while some have gained fame for their consistent dividend payments to shareholders.
Dividend payments can be given out in a number ways. Stock dividend gives shareholders a share of the profit in the form of additional stock in the company instead of in cash. Cash dividends on the other hand, are given out in, as the name suggests, cash/in the form of money.
Cash dividends give shareholders a direct cut of the revenue or profit. While investors are technically reinvesting their profits into the company when they take stock dividend payments, cash dividend payments allow the investor to keep his share of the profit. Generally, most firms who are looking to incentivise their shareholders will provide them with the option of choosing to revinest their profits in exchange for stock dividend, or take a cash dividend meaning that they keep their profits instead. Most brokers that handle dividend payments also offer this choice to their customers, pertaining to the terms of the company.
Unlike stock and other forms of dividend, cash dividends are paid on a regular basis, be it on a half yearly, quarterly or monthly basis. This has obvious advantages in the eyes of an investor. Not only do they receive additional profits alongside the profit they will potentially make when they sell the stock, it also helps mitigate risk as it allows the investor to slowly recoup their initial investment. A cash dividend example could be observed when a company gives out quarterly monthly cash dividend payments. Not only are current shareholders kept content, but potential investors are also incentivised. Sometimes however, cash dividends are paid out in lump sum amounts in the form of settlements.
Benefits of Cash dividend
Most companies that give out regular cash dividend payments tend to be established and of a certain size. Some companies may even set targets for their cash dividend payments. A cash dividend example here would be a company giving out lump sum cash dividend payments to its investors upon hitting a set revenue target or market cap.
Another benefit of cash dividend payments is simple. Unlike stock dividend, investors get to keep their share of the profits. Dividend payments are not (directly) based on share price and on ownership instead (the more stock you own the more cash dividend you receive due to your higher percentage ownership). Therefore, even if a stock is performing badly, dividend payments might help mitigate some of the potential loss.
Cash dividend payments have benefits for the companies paying them out as well. One cash dividend example could be found here. A company that is watching its stock price depreciate might gain some pushback due to their reputation for giving out consistent dividend payments. This might also cause investors to decide to not sell off their stock, preventing a mass selling spree resulting in the price tanking further.
Dividend payments are somewhat of an added bonus for investors that purchase a certain stock. However, a company’s reputation for giving out consistent cash dividend payments might also be included in the strategies of some investors. Cash dividends are the easiest way to get some bonus earnings, however, depending on the performance of the stock investors could benefit more from taking on stock dividends instead.