Dividends a Regular Cash Dividend Is Paid

Dividends A regular cash dividend is paid out of the company's cash supply. The dividend can be at a fixed rate, or can be loosely tied to the company's net income. This is the most common form of dividend, and is paid under most circumstances. Whereas a regular cash dividend is a recurring dividend, an extra cash dividend is a non-recurring dividend (Investopedia, 2012). This is a one-time dividend that is paid by the company. There is no expectation of a future extra dividend, in contrast to a regular dividend.

A special dividend is the same thing as an extra dividend. The only slight difference is that something termed a special dividend is not necessarily going to be paid out of cash. The company may pay with shares or some other asset. Most commonly, however, this type of dividend will be paid out of cash. A liquidating dividend is fundamentally different from the other forms of dividend.

The liquidating dividend is paid out when the business is in a state of liquidation, and the dividend is the amount that the shareholders receive. The other forms of dividend are typically paid as the result of ongoing business, using the proceeds of ongoing business. A liquidating dividend is not paid out of the ongoing business (Investopedia, 2012). Firms usually choose to pay out some cash as dividends, but not all of it.

Some firms do not pay dividends -- usually these are growth firms for whom investing in their own business is highly lucrative, given the high rate of return on the existing business or new business opportunities that the company has. Firms pay some dividends when they are not expecting substantial capital gains on their stock. This is because without the expectation of capital gains, the shareholders are not expecting any return. The dividend gives the shareholders some expected return on their investment, even if it is a relatively small amount. 2.

In general, firms pay out dividends when shareholders need some cash flow from their investment in order to retain the stock. Firms that are in a high-growth cycle will often eschew dividends because they are returning significant capital gains to the shareholders. Dividends can also prop up the share value because they give the investors something of value, in order to encourage more investment or at least to discourage the investor from selling his or her shares.

Firms invest in their own business where they are expecting high rates of return on their existing business or on the opportunities that the firm has available to it. 3. In general, firms that pay out a larger percentage of their earnings as dividends are mature firms. These companies do not have a significant growth rate, so the dividend is the primary form of return for most shareholders. Companies in this situation may also have steady cash flows, so that they know they can pay a certain rate of dividend.

Firms that do not have stable cash flows are hesitant to offer a dividend because they might be forced to miss a payment, which would hurt stock value. Firms that have a lot of growth opportunities, or have lucrative growth opportunities are less likely to pay a dividend. For these firms, they make a lot of money reinvesting in the business, so that the growth of the business offers a higher rate of return for the shareholders than the dividend would. 4.

If a company issues new stock, this does result in some dilution. There is dilution in ownership, and with that comes dilution in the value of equity in the existing shares (Hadzima, 2005). What will increase with the issuance of new shares is the number of shares outstanding. The value of the firm will remain the same, and the value of each share will be diluted.

The sale of new stock does not affect the value of the firm, because that is affected either by the book value of the company's equity, or by the expected future cash flows from stock ownership, whichever perspective one chooses to take. The new stock will increase the number of shares outstanding, because the current shares are not being sold.

With more shares outstanding and no change in company value, the value of each of the shares previously outstanding has declined, because that wealth must be shared with all the owners. 5. Investors can influence dividend policy through their actions. The point of dividend policy is to improve shareholder wealth. If shareholders are unhappy with the returns that the company's stock is giving them, they may choose to sell their shares. This would have the effect of sending a signal to the Board that the shares are not delivering enough value.

That would convince the Board to increase the dividend. A decrease in dividend is unlikely to be driven by shareholders, but by a need to conserve cash flow. A recent example would be Apple, which for a long time did not have a dividend but recently brought it back (Goldman, 2012). With less opportunity for share growth, the price leveled off. Management, knowing that it was unlikely to keep growing at the rate it has been, instituted the dividend and the share buybacks to maintain the share value. 6.

Shareholders can sometimes automatically reinvest in stock. There are a few reasons for this. The first is that it helps to maintain the percentage of the stock in the portfolio, because all the stocks are gaining either in capital gains or with dividends. By reinvesting the dividends, the stock continues with its same percentage, roughly. In addition, the company might be attractive to the investor, so logically the investor will want to plow that money back into the company.

The investor might earn more with that company than with other opportunities. There are no transaction costs to a share dividend, so it is a means of.