Forex Dictionary Terms

Dividend

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The dividend is part of the total return one gets from holding stocks (the other part being the capital gain), and dividends historically represent the dominant part of the average return on stocks. They provide an incentive to own stock in stable companies even if they are not experiencing much growth.

The reliable return attributable to dividends, not the less predictable portion arising from capital gains, is the main reason why stocks have on average been such good investments historically. Dividends are a distribution of a corporation’s earnings to its stockholders.

The company pays the dividend from the profit it generates throughout its financial year. They are not an expense of the corporation and, therefore, dividends do not reduce the corporation’s net income or its taxable income. When a dividend of 300,000 is declared and paid, the corporation’s cash is reduced by 300,000 and its retained earnings (part of stockholders’ equity) is reduced by 300,000.

In order to receive a dividend, the stockholder must have bought the stock before the ex-dividend date which is set by each individual company. Dividends on common stock are not legally required. Therefore, if the the company fails to make a profit there is no liability for the omitted dividends. The dividend is normally paid in two parts, an interim and a final dividend, almost always in the form of cash.

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