What is dividend and how they are paid out

Dividend are a concept that all stock investors need to understand if they don’t want to be “collapsed”. Dividend are the basis for valuing and evaluating the development of the enterprise as well as the amount to be paid to shareholders.

If you get into stock exchange, you must understand what dividend are? How are dividend paid? What are the advantages and disadvantages of each dividend payment method?

And this article will help you to figure out!

What is dividend?

Dividend is the remainder after the tax that a company is obligated to pay to shareholders after setting aside the prescribed fund and fulfilling the financial obligations. The amount of money used to pay dividend will be discussed and decided in the general meeting of shareholders.

dividend

Basically, the profit of a company will be divided into many parts such as reinvestment, reserve funds and others which is for shareholders is understood as dividend.

The meaning of dividend

An enterprise is a cooperation of one or several shareholders, so dividend are the goals for capital contributing of those shareholders. The better the business operates, the more profits are generated, therefore the more dividend each shareholder receive.

The value of dividend

In the company’s annual general meeting of shareholders, the dividend value will be determined and notified to shareholders in two ways:

  • Cash equivalent to the number of shares that shareholders are holding
  • Percentage compared to the company’s profit

The dividend value is calculated based on the unused profit of the enterprise and the business prospect in the upcoming time.

How to receive dividend

In order to receive dividend from the company, the prerequisite is that you must hold the shares before the ex-dividend date.

  • If the holdings are listed shares, dividend will be paid directly to your securities account.
  • If the holdings are unlisted shares (OTC), then to receive the dividend you need to contact the business directly.dividend-process

How to pay dividend

Paying dividend using cash

The enterprise pays dividend directly by transfer cash to shareholders’ accounts in VND par value in the following ways:

+ Pay by Check

+ Transfer

+ Payment order sent by post

Advantages of a cash dividend:

  • Receiving cash brings a sense of security and certainty to shareholders rather than continuing to send money back to the company to look up for the future results.
  • The cash dividend payment partly shows the company’s strong finacial source, creating a sense of security for shareholders when investing in the company.

Disadvantages of a cash dividend:

  • The receipt of dividend in cash makes shareholders taxable twice, including corporate income tax (20% – 22%) and personal income tax for dividend received (5%).
  • The payment of cash dividend is an obstacle for companies that are having financial difficulties or are in need of capital to expand their business.

Paying stock dividend

Paying stock dividend means that the company will issue more shares to shareholders. However, the issue of additional shares will not change the equity or share holding ratio of the shareholders because the additional shares are only used to pay dividend.

Advantages of a stock dividend:

  • Will not be taxed twice if receiving stock dividend
  • Paying stock dividend helps the company retain capital to continue expanding its business or overcome a difficult period.
  • Increase market liquidity.

Disadvantages of a stock dividend:

  • If the company does not perform well in the future, the stock price may fall.
  • There may arise odd shares that are difficult to sell in case shareholders want to liquidate their shares.

See also: What are convertible bonds? What are the advantages and disadvantages of convertible bonds?

The differences between cash dividend and stock dividend

The payment of dividend in cash or shares is significantly different and directly affects the cash flow of the Enterprise. Specifically, if paying dividend in cash, it means that profits generated from business activities will flow into shareholders’ accounts, out of the capital of the business.

On the contrary, if dividend are paid in shares, basically the profits generated and paid to shareholders remain in the business. Only transfer from Profit after tax to owner’s contributed capital.

So which way is the best choice?

Paying cash is the first priority. Therefore, most shareholders want to be paid dividend in cash. The receipt of cash dividend also shows that the enterprise has strong capital and is operating profitably.

However, in some specific cases, paying dividend in cash is also not the optimal solution, such as:

  • Borrowing to pay dividend
  • The business has no potential for growth
  • The company does not pay cash dividend

What is the dividend payout ratio?

Dividend payout ratio is the percentage (%) between Cash Dividend divided by Profit after tax of the business.

What is the best dividend payout ratio?

There is no exact figure for this question. To determine the optimal number, the dividend payout ratio must meet the following two issues:

First, businesses are provided with enough capital for business activities

Next, the business ensures that it still maintains a good return on capita

Other questions related to dividend.

Why does the company pay dividend to shareholders?

The company is established and operated by the cooperation of shareholders (owners) so the ultimate business purpose of the company is to bring profits to those shareholders. Therefore, the payment of dividend is also an affirmation that the company’s business activities are on the right track, generating profits and creating confidence for shareholders.

Why do many companies not pay dividend?

When meeting the company’s board of directors, if all shareholders have the belief that the company is still on a strong growth path and the use of reinvested profits will be more effective than paying dividend. No dividend will be paid at this time.

Of course, this needs to be approved by the majority of shareholders.

However, the failure to pay dividend sometimes also brings serious consequences because of certain events that the company does not operate effectively, even at a loss in the future, shareholders will lose a lot.

What is the last trading day?

The last registration date is the closing date of the list of customers owning securities and the date the issuer makes a list of securities owners for the purpose of exercising rights for shareholders.

At the closing date of the list, if the investor is on the list of securities owners, they will receive their rights such as the right to receive dividend, the right to buy additional shares, etc.

What is the ex-dividend date?

Ex-dividend date is the trading day on which investors buying securities will not be entitled to shareholders’ benefits such as the right to receive dividend, the right to purchase additional shares, the right to attend the General Meeting of Shareholders.

Conclusion

All information about dividend has been answered in this article, hopefully helping you to have a clearer view and make the right decisions when investing in the stock market!

See also: What is market cap? Top 5 companies with top market cap in the world

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