What Is Dividend: Definition, Type, And How To Calculate It

INVESTMENT, ACTIVELYSHARE.com – The distribution of profits for shareholders based on the shares owned, that is the meaning of stock dividends in general. In other words, the meaning of dividends is the results paid by the company to shareholders in the form of shares and cash.

While the rate of return itself is one of the things to expect when you invest in stocks. The form of return in stock investment is divided into two, namely capital gains and dividends.

In the investment world, the term dividend is the term most often discussed and is considered by investors. How not, the bigger the company’s dividends, the more maximum investor profits will be.

So, why dividends are quite popular with investors? In investing, dividends are bonuses or definite profits that you can get beyond the value of capital gains. Each company will distribute dividends to shareholders. Let’s see more!

Definition of dividend

In general, dividends are the distribution of profits or proceeds paid to shareholders based on the number of shares owned. Usually, the dividends distributed can be in the form of cash or shares.

1st definition

The meaning of dividends is a portion of a company’s profit or income, the amount of which is determined by the board of directors and ratified by the shareholders’ meeting to be distributed to shareholders.

2nd definition

Meanwhile, from the second definition, the meaning of dividends is part of the company’s profits that are distributed to shareholders. The amount of dividends to be distributed is proposed by the company’s board of directors and approved at the general meeting of shareholders (GMS).

Simply put, dividends are the rights or allotments of companies that get profits to parties who are investors or shareholders.

Usually, dividends are distributed by the company once or twice a year. However, there are also companies that do not distribute dividends because the funds from the company’s income are invested for business capital.

This condition is known as retained earnings. On the other hand, companies that record losses also usually do not distribute dividends.

Please read Issuers Definition and Steps to Assess Securities Offerings

Meaning of dividends and capital gains

There are two forms of profit or return that investors will get when investing in stocks. Gains or returns from shares can be in the form of dividends and capital gains.

Dividends are part of the company’s profits that are distributed to shareholders. The distribution of this dividend is determined by the company’s directors and approved by the shareholders’ meeting.

When a company records a large profit, it will usually distribute dividends to investors in the company. Dividend payments are regulated based on the provisions that apply to the types of shares available.

Shareholders who receive dividends are those who own shares of the company concerned during the dividend distribution period.

The amount of the dividend value or the amount of dividends received by shareholders depends on the number of shares that the investors own.

In contrast to dividends, capital gains are profits when investors sell shares at a price higher than the purchase price. In other words, capital gain is the difference between the selling price minus the purchase price.

For example, an investor buys company A shares for $. 40 per share. Then he sold the shares at a price of $. 45. Then the capital gain obtained by the investor is $. 5 per share.

This means that investors who get capital gains are able to enjoy the benefits of rising prices or the value of the shares they sell.

Types of dividends

There are five types of dividends you need to know. Here are the details:

1. Cash dividend

Cash dividends are dividends distributed by a company to its shareholders in the form of cash. This type of dividend can be said to be the most frequent distribution of dividends.

2. Stock dividend

Stock dividends are dividend distributions made in the form of shares of a company for its investors. As the name implies, investors do not get cash from the distribution of dividends. But will get an increase in the number of shares.

3. Property dividend

Property dividends are dividends that are distributed in the form of assets. This dividend is a type of dividend that is quite rarely done, usually because the distribution process is relatively difficult.

4. Liquidating dividends

Liquidation dividends are dividends distributed to shareholders in the form of a portion of the profit and a portion of the return on capital.

Companies that will provide liquidating dividends are generally companies that have plans to discontinue their company or the company is experiencing bankruptcy.

5. Debt Promised Dividend

Promised dividends are dividends distributed from the company to shareholders in the form of debt covenants. In this type of dividend, the company makes a promise to its investors that it will pay the dividend at a predetermined time.

Please read IPO Definition, Conditions, Mechanism, Advantages & Disadvantages

How to calculate dividend

To calculate dividends, there are some data that need to be understood. The data are the company’s net profit or net profit per share, dividend pay out ratio (DPR), and the number of outstanding shares.

Earnings per share or what we often call Earning Per Share (EPS) is the division between the net profit earned by the company in a certain period with the number of outstanding shares.

Dividend Payout Ratio (DPR) is a ratio that shows the percentage of each profit earned and distributed to shareholders or investor in the form of cash.

Outstanding Shares is the total number of shares of a company (issuer) owned by investors. These investors include institutional and individual investors, including stocks held by short-term traders.

AA company has 1 million shares. The company managed to generate a net profit of $ 50 million.

The dividend payout ratio policy is 40 percent of the net profit generated by the company. By using this data, the way to calculate dividends in AA companies is as follows:

Dividend = Net Profit x Dividend Payout Ratio

= $ 50,000,000 x 40 percent

= $ 20,000,000

Dividend / shares outstanding = $ 20,000,000/1,000,000 shares

= $ 200 per share

This is information about what dividend is and dividend types. It could be said, the meaning of dividends is the right or allotment of the company that benefits to those who are investors or shareholders.

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