What is a Dividend?
A dividend is a distribution of value a company pays to its shareholders, typically from profits. Dividends are a way for owners to receive returns without selling shares. They are most often paid in cash but can also be paid as additional shares (less common).
Dividends are not guaranteed. A company’s ability to pay them depends on profitability, cash position, legal rules, and governance decisions.
How dividends work
Dividends are usually authorised through the company’s governance process (for example, directors’ decision and required approvals). Key terms include:
- Declaration date: when the dividend is approved and announced
- Record date: shareholders on record at this date receive the dividend
- Payment date: when money is actually paid
- Dividend per share: amount paid for each share held
Companies may pay:
- Regular dividends (e.g., quarterly or annually)
- Interim dividends (paid during the year)
- Final dividends (approved after year-end results)
- Special dividends (one-off payments)
Why companies pay dividends
Companies may pay dividends to:
- Return surplus cash to shareholders
- Signal stable cash generation
- Provide predictable shareholder returns
Other companies reinvest profits into growth, hiring, R&D, or acquisitions rather than paying dividends.
Accounting impact of dividends
Dividends are distributions of profit, not an operating expense. When a dividend is declared, a company typically records a liability(dividends payable) until payment. Paying a dividend reduces cash and reduces equity (often retained earnings).
owner-managed businesses often weigh dividends against salary because tax and compliance treatment differs—professional advice is common when setting a remuneration strategy.
Are dividends taxed?
Dividends are often taxed differently from salary, depending on jurisdiction and personal circumstances. The company also typically needs profits/reserves available to distribute.
What is dividend yield?
Dividend yield measures dividends relative to share price, usually expressed as a percentage. It’s a way to compare income return between investments.
Can a company pay a dividend if it has low cash?
Even if a company is profitable, paying dividends requires sufficient cash (or financing). Declaring dividends without a realistic cash plan can create strain.
