Dividend

Dividend is the income you receive as a shareholder from a company.

When you buy an ordinary share in a company you become a shareholder (an owner of the business) and to that extent you will have certain entitlements including the right to receive dividend payments as set by the board of directors and approved by the shareholders (sometimes called members). A dividend is a cut of the profits earned by the business for the year. This pay-out is not guaranteed and where it exists at all, the amount you'll receive will vary from company to company and year to year. Leading FTSE 100 companies and others tend to manage shareholder expectations about future dividend payments by giving indications of their dividend policy from time to time.

Whereas a smaller growing company may not pay dividends at all, larger companies may pay out (say) 33% to 50% of their pre-tax profits.

For a smaller growing company, investors may be prepared to forgo the chance of any significant dividend in the hope that by retaining the cash inside the business, the managers can invest it to generate sparkling capital growth. Conversely, larger companies have less potential for rapid capital growth but are more likely to pay healthy dividends which are steadily rising as the years go by.

A dividend can be expressed as a percentage of the share price - see yield and dividend cover.

Last Updated: June 2007 © Moneyextra.com

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