A dividend is a corporation’s distribution of cash or stock to its stock holders on a pro rata (proportional) basis. Investors are very interested in a company’s dividend policies and practices. Dividends can take four forms: cash, property, scrip (a promissory note to pay cash). Or stock. Cash dividends predominate in practice. Also, companies declare stock dividends with some frequency. These two forms of dividends will be the focus of discussion in this chapter.
Dividends may be expressed in two ways: (1) as a percentage of the par or stated value of the stock, or (2) as a dollar amount per share. The financial press generally reports dividends as a dollar amount per share. For example, Boeing Company’s dividend rate is $1.05 a share, Hershey Foods Corp’s is $0.93, and Nike’s is $0.95.
Many companies pay a cash dividend (quarterly or annually) to the owners of its shares. This is an enticement to investors to purchase that company’s shares, and represents a way of distributing some of a company’s profits to its ultimate owners. Individual investors can capture profits in other ways, as well – such as through capital gains.
Dividend is a portion of company profits paid to stockholders as a return for the risk that they take as owners.