How dividends work in the financial industry

Most investors conduct stock analysis to invest in dividend stocks because dividends act as popular sources of investment income. On the other hand, for the company issuing the dividend, the dividend gives them an opportunity of redistributing their profits to their shareholders. This is done as a way of thanking their shareholders for support and also encouraging them to continue investing. Dividends also act as announcements of company success in the financial market or the economy in general. Dividends are basically issued from retained earnings of a company. As such, only a company that is well profitable will be in a position of issuing dividends consistently.

It is important to understand that some companies can still declare dividends in order to create an illusion of success or profitability. However, this is an exception instead of a rule. When investors consider dividend investing, the dividends they will be paid will be in the form of cash. But it is also possible for dividends to come in form of extra shares of a company’s stock. Regardless of how the dividend is paid, in cash or shares, the amount an investor will receive is subject to his/her present-day ownership stake in the issuing company.
For example, if a company’s outstanding share is 1 million and declares a dividend of 50 cents, an investor who has invested in dividend stocks and has 200 shares will receive $100 and the company will pay out $500,000 in dividends. If instead the company issues 20% stock dividend, an investor will receive extra 40 shares and the company will issue out 200,000 shares. Once a company pays a dividend, the value of the total dividend will be deducted from the retained earnings. Basically, it is the total amount of money a company has on their accounts that will be used to fund any growth projects or pay out dividends.

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