Dividends are a portion of a company's profits that are
paid out to its shareholders. When a company makes a profit, it has two
choices: it can either reinvest those earnings back into the business or
distribute them to shareholders as dividends. The amount of dividends paid out
per share is known as the dividend yield, which is calculated by dividing the
annual dividend per share by the share price.
How
Dividends Work
- Generating
Profits: The company
earns profits and accumulates retained earnings.
- Deciding on Dividends: The management team decides to
pay out some of these excess profits to shareholders instead of
reinvesting them back into the business.
- Board Approval: The Board of Directors approves
the dividend payment plan.
- Announcement: The company announces the
dividend details, including the value per share, the payment date, and the
record date.
- Payment: The dividend is paid to
shareholders on the specified payment date.