In the business world many companies attracts investors by showing their reliable earnings and fat dividends. Why do some companies pays dividends and some do not, All the companies which pays dividends are not profit earning companies or raising up in the market and the companies which do not pay dividends are not going in loss or going down in the market.The most essential factor that keeps company running is the capital, this can be collected from different sources such as banks, finance corporations etc. people who invests or put their money/property in an company are called shareholders, if the company performs well these shareholders get returns from the company in different ways such as cash or shares, Some company pays direct cash while other companies pay in the form of shares. Dividend is a kind of return to shareholders for their investment, Dividend can define as a portion of amount paid by the company from its earnings to its shareholder or investors.( Kiran Thapa, Narayan Koirala(2003))
"The only thing that gives me pleasure is to see my dividend coming in." (John D. Rockefeller) .The simple way to convey financial well being for any company to its shareholders is to sending a mail saying "the dividend check is in the mail." Dividends mails not only send the checks to their shareholders but also conveys the company’s future programmes, prospectus and companies ability to pay constant dividend over the time and may increase it in the future.( Investopedia ULC (2007) )
Dividend policy decides whether the company should pay cash dividends or not to its shareholders, if the company has decided to pay the dividends then the dividend policy determins the payout and retention ratio. (Omer L. Carey, Musa Essayyad,(2005))
According to Mark Kennan when a company announces the dividend pay out there are four important date for dividend payout they are as follow
Declaration Date:
This is the date on which the company announces to pay dividend. It also announces that the amount it is going to pay per share to its shareholders. On this date company formally announces the date of Ex-dividend, Date of Record and the Payment Date.
Ex-Dividend Date:
This is the important date for the investors, as this is the last date for purchasing the stock of the company.
Date of Record: Date of Record usually will be 2 or 3 days after the Ex-Dividend date, this is the date on which the company list outs all the shareholders who are on ex-dividend date, to pay the dividend.
Payment date:
This the date on which the company pays the dividend to its shareholders who are listed on the Ex-dividend date.( Mark Kennan (2009a) )
Types of Dividends:
Dividends are decided by the board of directors of the company, a company may choose to pay dividends to the investors in different forms
Cash Dividends:
Dividends that are paid in the form of cash or check on regular basis to the investors
Property Dividends:
Dividends that are paid in the form of property, a property may be any item with tangible value like car, silver coins, gold coins etc. At the Declaration Date these dividends are recorded at market value.
Stock Dividends:
Dividends paid in the form of stock of the company are known as stock dividends. A company may choose to pay stock dividends for several reasons such as to lower the share price, insufficient capital etc.
Special One-Time Dividends:
These dividends are the special dividends paid in addition to the regular dividends, they are very rare dividends paid at one time by the companies for various reasons such as major proceeding wins, business sale etc. They can be given as cash, stock or property dividend. (Joshua Kennon)
Though there are lots of firm that pays dividend and non-paying, different encomiasts has different assumption which puzzled every layman. Company changes the dividend throughout time in response to the changes in their opportunity set. According to DAVID J. DENIS et al(2007), only few companies used to pay dividend in earlier days because that time company’s opportunity transcend(go beyond the limit) their internally procreated capital, Later years company’s internal fund go over the investment opportunity and the company pay out excess fund as dividend.
There are various reasons for companies paying dividends, According to Mark Kennan some companies select to pay premium to stockholders, owners as cash or stock which is given on regular basis as dividend. Following are the some of the reasons for the companies to pay dividends:
For payment to stockholders or investors:
The main purpose of investors for investing is money so dividends are an opportunity for them to get back their return. Though price of the stock falls investors find it more desirable if they are paying dividend.
For stability of company:
Paying dividend is one of the good way to show stability of the companies so when company makes the record of consistent payment dividend investor view the company as less risky to invest.
Raising the demand for stock:
dividend paying stocks are more profitable than firm, and during the recession also the stock price doesn’t fall as much because investor are still money making.
Payout the investors the excess fund:
after holding the minimal capital for reinvestment some companies payout the cash as a dividend rather than holding large cash reserves.
For goodwill and reputation:
When a company announce dividend various publications and business media publish the news to investors which make name recognition of company
For dividend reinvestment plan:
Under dividend reinvestment plan investors can automatically use dividend to buy more share of the company, they don’t need to pay any fees for purchasing. .( Mark Kennan (2009b) )