Dividends are portions of profits that a company pays to its shareholders. These payments which are made on a regular basis – mostly on an annual or quarterly basis – are a stable stream of income for investors without the need to sell shares for capital gains.
Companies pay dividends to investors as a form of reward to investors for putting their money into their business. What’s more, regular dividend payments also reassures shareholders that the company they’ve invested in is profitable. Dividends are also tax free in countries like Nigeria.
Typically, companies reinvest a portion of the profits back in the business to improve growth and allocate the surplus as dividends payments to the shareholders. That said, not all companies pay dividends, some choose to reinvest profits back into the business.
Types of Dividends
The dividend payments usually take the form of cash or additional shares in the company and are decided by the company’s board of directors, though they must be approved by shareholders.
Cash dividends are the most common type of dividend paid to investors. The cash is directly paid to the account of the shareholders. Cash Dividend is paid per share of stock, that is if you own 1000 shares in a company and that company pays N20 in cash dividends per share at the end of a year, you will receive N20,000 as dividend income.
Rather than pay cash to the shareholders the company can reward investors with additional shares. For context, a company might issue a stock dividend of 10%, this would mean 0.1 shares for every share owned by existing shareholders, hence the owner of 1000 shares would receive 100 additional shares.
Dividend payments follow a chronological order of dates that determines who qualifies for dividend payments. As an investor, you should be aware of the following terms:
- Dividend Announcement Date: The board of directors of a company determines the amount of dividend to be paid and announces to investors the dividend amount and payment date. The date of this announcement is known as the dividend announcement date.
- Dividend Record Date: Record date is the date the company reviews its register to identify the shareholders who are eligible to receive the company’s future dividend payment.
- Ex-dividend Date: Once the company has set the record date, the ex-dividend date is set based on the rules of exchange where the company is listed. The ex-dividend date for stocks is usually set one or two business days ahead of the record date. An investor that purchases a stock on its ex-dividend date or after, will not receive the dividend payment. Instead, the seller gets the dividend. However if the investor purchased the stock before the ex-dividend date, he/she gets the dividend.
- Payment Date: This is the date the company pays the dividends to the shareholders.
What type of companies pay dividends?
Typically stable and large companies are more likely to pay dividends than growing companies or start-ups. This is because large mature companies do not necessarily need to reinvest large portions of their profits to grow the business unlike start-ups and smaller firms.
Examples of dividend paying stocks in Nigeria include Guaranty Trust Holdco, Zenith Bank, MTN Nigeria and Dangote Cement. What these companies have in common is that they are all stable and mature companies.