Dividends: Overview, definition, and example
What are dividends?
Dividends are payments made by a company to its shareholders, typically as a distribution of profits. These payments can be issued in various forms, such as cash, additional shares of stock, or other assets. Dividends are usually paid on a regular schedule, such as quarterly or annually, and are determined by the company’s board of directors.
For example, a company might declare a dividend of $1 per share. A shareholder owning 100 shares would receive $100 as a dividend payment.
Why are dividends important?
Dividends are important because they provide a return on investment for shareholders, making them a key incentive for investing in a company. For investors, dividends represent a tangible benefit and a share in the company’s profitability.
For companies, paying dividends can demonstrate financial health, attract new investors, and reward long-term shareholders. However, dividends must be carefully managed to balance shareholder returns with reinvestment in the business for growth.
Understanding dividends through an example
Imagine a technology company earns $10 million in profit during a fiscal year. The company’s board decides to distribute 40% of this profit as dividends and reinvest the remaining 60% into the business. If the company has one million shares outstanding, each shareholder would receive a dividend of $4 per share.
In another example, a startup may choose not to pay dividends, instead reinvesting all profits into growing the business. This strategy is common among early-stage companies that prioritize expansion over distributing profits to shareholders.
An example of a dividends clause
Here’s how a dividends clause might appear in a corporate agreement:
“The Board of Directors may declare and pay dividends to shareholders from the corporation’s surplus or net profits, subject to applicable laws and any restrictions set forth in this Agreement. Dividends may be paid in cash, stock, or other property as determined by the Board.”
Conclusion
Dividends are a critical part of shareholder rewards, offering a return on investment while reflecting a company’s financial health and profitability.
By including clear provisions for dividends in corporate agreements, businesses can maintain transparency, align with shareholder expectations, and manage their financial strategies effectively.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.