Definition: A payment of a portion of a corporation’s profits to its shareholders who are, after all, the owners. Dividend payments, usually made quarterly, must be approved by the Board of Directors.

Example: The Novartis prescription drug company has had a tremendous history of increasing its common stock dividend every year as shown here. For year 2014 it paid quarterly dividends that totaled $2.60 for each share of its common stock held by investors.

Investeach explains: Dividends are said to be a portion of a company’s profits but this isn’t really the case. Corporation can suffer losses and continue paying the dividends they always paid using the cash that they’ve built up over prior years. The hope is that things will soon get better and profits will return. These corporations may be known for their long history of paying steady dividends. They may be loathe to lower or eliminate their dividends and shock their shareholders who have come to relying on those payments to live.

The economic crisis that began in late 2007 was so traumatic that some of the biggest banks in the U.S. not only had to cut their dividends, but later eliminate them altogether. For shareholders it was a bitter pill to swallow.

Companies like to gradually increase the dividends they pay on their common stock. Dividends on preferred stock are the same amount each year.

Finally, consider how different a dividend is than a bond interest payment that companies simply must pay on bonds they’ve issued. Companies can skip dividends during bad times. Not so interest payments. If they do, bondholders will push back, possibly forcing the corporation into bankruptcy. For this reason, raising money by selling stock is much safer than raising money selling bonds!

Riddle me this:

1. Who must approve the payment of dividends?
2. How frequently are dividends usually paid?
3. Where does the company get the money needed to pay dividends?
4. What can companies do to conserve cash if the economy and the company are doing poorly?
5. Dividends on what type of stock are the same year-in and year-out?