"Dividends may not be the only path for an individual investor's success, but if there's a better one, I have yet to find it"- says the author of The Ultimate Dividend Playbook, Josh Peters.
For a sensible investor, dividend investments are perhaps one of the closest things that guarantee capital appreciation. For others in the stock market ball game, dividend products may serve to reduce the amount of volatility in a portfolio. Having said this, Warren Buffett's number 1 rule of investing- “don't lose money” followed by number 2- “don’t forget rule number 1”, is probably what makes dividend attractive to so many investors.
What Are Dividends?
Dividends are that portion of a company’s profit that it may possibly decide to pay-out/ disburse to shareholders and not retain it to meet financial requirements such as, invest in R & D, product launches, acquisitions etc. Publicly listed companies pay dividends to shareholders as a means of rewarding their investment in the company. Cash dividends are the most common form of dividend. However, dividends may be issued in the form of shares of stock or additional property.
How are they paid?
Dividends are paid at a planned frequency- be it on a monthly, quarterly, or annual basis. Interestingly, at times, companies may make dividend payments even when they don’t make suitable profits to maintain their established track record of making regular dividend payments.
What Are the Types of Dividends?
There are numerous types of dividends, some of which do not involve the payment of cash to shareholders-
Cash dividend- the most common form of the dividend type, this is paid in cash to those investors holding the company's stock on a specific date.
Stock dividend- refers to issuance of its common stock by a company to its common shareholders without any consideration.
Property dividend- a non-monetary dividend to investors may be opted for instead of cash or stock.
Scrip Dividend -when a company is doubtful of having sufficient funds to issue dividends in the near future, it issues scrip dividend which is a promissory note.
Liquidating Dividend- When the Board intends to return the capital originally contributed by shareholders as a dividend, it is called a liquidating dividend. This is often a precursor to shutting down the business.