Dividends Types and Definition

Definition of Dividends


Dividends are the distribution of a company's gains over a fixed period of time to shareholders.  This disbursement of capital is done so under the authority of the board of directors.  Dividends are issued on a per share basis and is called a per share dividend

What Types of Companies Issue Dividends

Growth Companies

Dividends are generally issued by large blue chip corporations.  Most start-ups and high growth companies are unable to share their profits directly with investors in the forms of dividends, because the money must be reinvested in order to extend the rapid growth phase.  So, while traders may not receive dividends, the investor will be able to see a higher rate of return on the stock itself. 

Blue Chips

Large stocks which lack volatility will issue a dividend to investors in order to make the security a more attractive long term buy and hold investment.

Types of Dividends

Cash

In the majority of cases dividends are issued on a cash basis.  For example, if a shareholder holds 1,000 shares and the per share dividend is $1, the investor will receive a check for $1,000.

Stock

Dividends can be issued to shareholders in the form of stock.  The issuing company will announce a percentage of shares to be delivered to the investor based on their current holdings.  So, if the stock dividend is 10% of the shares, and the investor holds 1,000 shares, he or she will receive an additional 100 shares.

Mutual Fund Dividends


Dividends can also be distributed by mutual funds.  This occurs when the mutual fund company disburses funds to investors based on their holdings.  Mutual fund managers will pay dividends based on the following:  (1)  portfolio holdings and (2) realized capital gains at years end.
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