All About Dividends And Dividend Payouts

Dividends are cash payouts to company shareholders based on the profitability of the company. Although dividends payments are not mandatory, they are an attractive benefit to prospective investors. Many companies offer dividend payouts because they recognize that vast numbers of investors are allured by the offer of a constant cash flow. Publicly traded companies issue stocks to investors as a means to raise capital for business operations. In turn, companies offer their stockholders an opportunity to earn a rate of return on their investment through stock appreciation and dividend payouts. These payouts are generated from company profits.

Dividends are the portion of company profits not deemed necessary for the projected day to day operations of the company. Generally cash payouts are distributed to investors every quarter. However, since dividend payouts are based on profitability, companies may choose to forgo or decrease quarterly payouts in times of financial difficulty.

There are several ways that dividend payouts can be determined. Payouts can be based on the company’s annual profits broken up into four quarterly payments. Or, payouts can be based on quarterly profit earnings. While some companies elect to set dividend payouts based on a percentage of the companies profits per dollar. Others find that a fixed quarterly payout amount is most attractive to investors.

Dividend payouts are beneficial to investors for a number of reasons. First, routine dividend payouts can be used to gauge the profitability of a company. An increase or a decrease in dividend amounts indicate either an increase or decrease in a company’s profitability from quarter to quarter or year to year depending on how dividends are tabulated. Ultimately, this has a direct impact on shareholder’s rate of return. Second, dividends provide investors with immediate cash.

However, not all investors view dividends as an attractive source of instant cash. Some investors would prefer that companies forgo dividend payouts, citing such concerns as the need to increase company assets, decreasing liabilities, and funding needed construction projects. Investors have also been reluctant to accept dividend payouts because they are taxed at a higher rate than capital gains earnings.

Depending on your preferred investment strategy dividend payouts may or may not be suitable for you. For some, dividends are a welcomed means to further increase their rate of return on their investment. For others, dividend payouts are viewed as a hindrance to the potentially larger and slightly less taxed earnings that stem from stock appreciation.