Dividend
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What are Dividends?
A company distributes a portion of its profits as dividends to its shareholders. Besides companies, mutual funds and exchange-traded funds (ETFs) also pay dividends. Most of the time, the payment is made in cash, but it may also be made in the form of additional shares. The dividend yield can also be used as a key indicator for valuing a share. An individual key figure alone is often insufficient for a valuation, and a more comprehensive valuation model incorporating several key figures should be used.
Which Companies Pay Dividends?
Generally, large, established companies pay high dividends, since their profits are more predictable.
There is a regular payment of dividends, especially in the following industries:
- Finance
- Oil, Gas, Energy
- Consumer Goods
- Healthcare/Pharmaceuticals
It is less likely that dividends will be paid by startups or high-growth companies (e.g., in the technology sector). As a result of the high costs associated with research, development, or expansion, dividends cannot be paid out. Conversely, when a company has a high return on equity, such as a growth company, it makes no sense to reduce equity through dividend payments. This is because the company is likely to generate a higher return if money is reinvested in further growth of the company rather than being distributed to shareholders.
Reasons for Dividend Payments
Dividends are paid by companies for a variety of reasons, including:
- Company aims to retain shareholders by encouraging them to hold the shares for an extended period of time.
- Dividends have positive effects on the company - investor confidence is maintained and retention is increased. Furthermore, dividend payments can be used to attract new shareholders.
- A high dividend payment demonstrates that the company's business is performing well and that high profits have been achieved.
- The payment of a high dividend, however, may also indicate that the company is currently not investing in new projects that are expected to deliver even higher returns in the future - rather, it is distributing the dividend to shareholders.
- In the event that a company that has always paid dividends suddenly begins to pay less or does not pay a dividend at all, it may be indicative of financial difficulties.
- However, the fact that the dividend has been reduced or is not paid out does not necessarily indicate a problem. In fact, the company could be using the profits to develop a new project that will benefit shareholders in the long-term.
What is the Effect of Dividends on the Share Price?
Share prices can be affected by dividend payments, but it is not possible to make reliable predictions or general statements. Often, investors buy shares in the company just before the Annual General Meeting in order to benefit from dividend payments. Consequently, the share price is likely to increase significantly. A company with a declining share price may also pay dividends.
Immediately following the Annual General Meeting, the company's value is reduced by the amount distributed. In spite of this, it does not affect the share price to the same extent, as supply and demand and tax effects must also be considered.
Who Determines the Dividend Rate?
The profits generated by a stock corporation can be used for a variety of purposes, such as building up reserves or making investments. It is also possible to distribute a portion of the profits to shareholders. It is decided at the annual meeting of the stock corporation what amount will be distributed as dividends.
Dividends approved by the General Meeting are automatically paid three business days after the General Meeting. It is important to note, however, that in order to receive the dividend, shareholders must have the shares in their securities account on the day of the general meeting.
What is Dividend Yield?
The dividend yield is the ratio of the dividend per share to the current share price and can be calculated using the following formula:
In addition, dividend yield can be important in the selection of shares: dividends are not decided arbitrarily by the general meeting, but are determined by both profitability and capital of the company. Thus, a high dividend yield can serve as an indication that a company has a solid business performance (compared to other companies in the same industry), which in turn may make it an attractive investment.
The dividend yield alone, however, does not provide sufficient information to evaluate a company. For this purpose, other key figures should be considered, such as:
- Sales development
- Equity ratio
- Price/earnings ratio
- Return on Equity
- Free Cash Flow
- and many more
When and How Often are Dividends Paid?
In Switzerland and Germany, dividends are usually paid on an annual basis; in the United States, dividends are typically paid on a quarterly basis. The Annual General Meeting determines when the dividend will be paid. Special dividends may be paid in addition to regular dividends.
Dividend Dates
Dividend payments are subject to the following dates:
Announcement Date
As of this date, the management has decided to pay a dividend and has set the payment date plus the record date.
Record Date
This day determines which shareholders are entitled to receive dividends. At the close of trading on the record date, shareholders must be holders of the shares.
Ex-Dividend Date
The dividend payment will not be payable to anyone who purchases shares in the company on or after this date.
Payment Date
This date is the date on which the dividend is paid to the shareholders.
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