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  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Expert

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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  • Financially Reviewed By
    Peggy James, CPA
    Peggy James CPA

    Peggy James, CPA

    Independent Accountant and Financial Coach

    Peggy James is a certified public accountant with a Master of Accounting. She has spent the past several years of her career focused on working in higher education finance roles. Peggy also has accounting and finance experience working in the corporate and nonprofit sectors.

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  • Updated: June 30, 2023
  • 4 min read time
  • This page features 3 Cited Research Articles
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How to Cite Annuity.org's Article

APA Brock, T. J. (2023, June 30). Dividend. Annuity.org. Retrieved June 20, 2024, from https://dev.annuity.org/personal-finance/investing/dividend/

MLA Brock, Thomas J. "Dividend." Annuity.org, 30 Jun 2023, https://dev.annuity.org/personal-finance/investing/dividend/.

Chicago Brock, Thomas J. "Dividend." Annuity.org. Last modified June 30, 2023. https://dev.annuity.org/personal-finance/investing/dividend/.

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What Is a Dividend?

A dividend, or stockholders’ dividend, is a payment made by a company to its owners and stockholders. The dividend payment represents a portion of the company’s current net earnings, but special dividend payments, funded with retained earnings or asset sales, are sometimes made.

Well-established companies typically pay higher dividends than early-stage companies, as mature firms tend to have more stable, predictable earnings and fewer investment opportunities than growth-oriented companies. As a result, established firms often return more cash to their stockholders in the form of dividends.

Most companies pay dividends once per quarter, but the frequency can vary. Some companies pay a monthly dividend, while others pay an annual dividend. Others pay no regular dividend at all.

Ultimately, the amount and frequency of dividend payments is determined by the company’s board of directors.

Learn from financial expert Thomas J. Brock, CFA®, CPA, why dividends are especially important for retirees.

Types of Dividends

The vast majority of dividend distributions are made in cash. However, a company may sometimes pay a stock dividend to its shareholders. Rather than a cash payout, a stock dividend involves the issuance of additional shares of stock.

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How Are Dividends Determined?

The determination of a dividend is unique to the company who is paying it. Deciding on the amount of a dividend is a big strategic decision for a company, given the focus many investors put on the amount of income produced by their investments.

As a result, most companies plan, communicate and initiate their dividend distributions in line with a well-structured dividend policy. At a minimum, the policy outlines the amount of future dividend payments and their frequency.

The three primary types of dividend policies are outlined below.

Stable Dividend Policy

A stable dividend policy is the most common and easiest to administer. The objective is to pay a steady and predictable dividend over time, regardless of earnings volatility.

Dividend increases or decreases are aligned with the long-term growth trajectory of the company, not quarter-to-quarter earnings fluctuations. Ultimately, this type of plan gives stockholders a high degree of confidence in the amount and timing of future dividends.

Constant Dividend Policy

With a constant dividend policy, the company pays out a certain percentage of its earnings every period. If earnings are up, investors get a larger dividend; if earnings are down, investors get a smaller dividend — or perhaps no dividend at all.

The main drawback with this type of policy is the potentially volatile nature of the dividend, which can make it difficult for those investing to plan cash flow.

Residual Dividend Policy

With a residual dividend policy, a company prioritizes the reinvestment of cash flow over dividend payouts, meaning that the company only pays dividends if it has earnings left over after making investments in capital expenditures and working capital.

At a high level, this process works as follows:

  • An example company has net earnings of $100 million.
  • The company’s investments in capital expenditures and working capital total $85 million.
  • Subtracting capital expenditures and working capital investments from net earnings, this leaves $15 million available for dividend distributions ($100M – $85M = $15M).

A residual dividend policy has the potential to be more volatile than the other types of dividend policies. Nevertheless, many companies and stockholders favor this type of arrangement due to its focus on the creation of long-term economic value.

Read More: Federal Tax Brackets

Example of a Cash Dividend

Let’s look at an example scenario from the stockholder’s perspective, as you may encounter a situation similar to this one while evaluating your own personal finance situation. Assume the following:

  • You own 1,000 shares of Company XYZ stock, which is currently priced at $200 per share.
  • Earnings per share (EPS) totaled $7 for the quarter.
  • Company XYZ maintains a stable dividend policy with quarterly distributions.
  • Long-term growth projections support a quarterly dividend payment of 40 percent of earnings.

Based on the information above, you as a stockholder can expect the following quarterly dividend payment:

Quarterly Dividend Payment = Number of Shares Owned × EPS × Dividend Payout Ratio
Quarterly Dividend Payment = 1,000 × $7 × .40 = $2,800

Annualized, this produces the dividend yield computed below.

Dividend Yield = (Quarterly Dividend Payment ÷ Number of Shares Owned × 4) ÷ Stock Price
Dividend Yield = ($2,800 ÷ 1,000 × 4) ÷ $200 = 5.6%

Closing Thoughts

Dividends are just one aspect of a stock’s worth. The potential for stock price appreciation is often a much larger determinant of value. Smart investors are aware of this and base their investment decisions on the complete picture, not just the size of a dividend payment.

That said, dividends are very important to income-focused investors and especially important to retirees, who often rely on the income to live. For these investors, tracking the consistency of a company’s dividend over time is a smart way to assess the reliability of the income.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: June 30, 2023

3 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Corporate Finance Institute. (2022, May 7). Capital Expenditures. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/accounting/capital-expenditures/
  2. Corporate Finance Institute. (2022, May 7). Retained Earnings. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/accounting/retained-earnings-guide/
  3. Nasdaq. (n.d.). Glossary of Stock Market Terms: Working Capital. Retrieved from https://www.nasdaq.com/glossary/w/working-capital