The Meaning of Dividends in Stock Investments You Need to Know

Dividends in Stock Investments You Need to Know
Dividends in Stock Investments You Need to Know. photo by pixels.com/Karolina Grabowska

What is dividends in stock investments

The distribution of profits for shareholders based on the shares owned, that is the meaning of stock dividends in general. In other words, the meaning of dividends is the results paid by the company to shareholders in the form of shares and cash.

While the rate of return itself is one of the things to expect when you invest in stocks. The form of return in stock investment is divided into two, namely capital gains and dividends.

Capital gain is the difference between the selling price minus the purchase price. For example, if we buy a share from a national company for $5,500 and sell it at $6,000, then the capital gain obtained is $500 per share, or as a percentage of 9%.

While the return in the form of dividends means that dividends are part of the company's profits distributed to shareholders. As an investor who buys a stock, you certainly expect the company to experience a profit or profit.

If the company posts a large profit, the company can distribute the profit to its shareholders in the form of stock dividends. 

The meaning of this dividend has the aim of maintaining the company's capital level; This dividend provides benefits to the recipient because it reduces the amount of tax to be paid (stock dividends).

In another explanation, the meaning of stock dividends is dividend payments made in the form of additional shares and not in the form of cash payments. 

The company can decide to distribute this type of dividend to shareholders if the company's cash availability is limited.

For dividends distributed by the company to shareholders, it is calculated based on the difference between the company's profit minus retained earnings. Retained profit is profit saved by the company to finance future expansion.

So can the company only use the retained earnings option to allocate the profits earned? 

The company has several options in using profits, namely as follows where the decision to use profits is determined in the GMS (general meeting of shareholders):

  • Retained Earnings: Retained profits of the company, are used for reinvestment and are not distributed to shareholders.
  • Stock Buy-Back: Profit is used to buy back (buy-back) shares on the stock exchange. Stock buy-backs are common on Wall Street, but very rare in Asia.
  • Dividends: Profits are paid in cash to shareholders as dividends.

Meaning of Dividends: Types of Dividends

Meaning of Dividends: Types of Dividends
Several types of dividends that you need to know
Further discussing the meaning of dividends, there are several types of dividends that you need to know. In stock investment, the meaning of dividends has several forms that can be adjusted to the ability and position of the company.

Meaning of Dividend: Cash Dividend

The first type of dividend is Cash Dividend or cash dividend. This type of dividend is paid to the owners or shareholders in the form of cash in cash.

This cash dividend is the type most often used by various companies. In addition, cash dividends are also the type that is the favorite of many shareholders.

Meaning of Dividend: Stock Dividend

The next type of dividend is the type of stock dividend or stock dividend which is given in the form of shares. This type of dividend will later be able to increase the number of outstanding shares.

If dividend payments are made in the form of shares, the liquidity position of a company will not change. This is because the payment of stock dividends is not part of a company's cash flow.

Meaning of Dividend: Goods Dividend

The next type of dividend is the property dividend or goods dividend, which is a type of dividend that is distributed in the form of goods, other than cash. However, there are several things that must be considered by the company in distributing this dividend.

A company must ensure that the goods that are distributed are goods that can be shared. Not only that, it must also be ensured that the distribution of dividends by a company cannot interfere with and have a periodic effect on the company.

Meaning of Dividend: Debt Dividend

Dividends can also be given in the form of a script or debt promise, this type of dividend is referred to as a script dividend. In the existing script, a certain amount will be stated to be paid to the script holder.

The script will also include the due date to pay it. The application of dividends using this type of script will make a company have debt, but in the short term.

Meaning of Dividend: Liquidating Dividend

The next type of dividend is different from other types of dividends, this liquidating dividend does not come from profits obtained from the company. This type of dividend is the opposite of all types of existing dividends.

The distribution of dividends that are distributed alone will refer to a reduction in the capital of a company.

Dividend Meaning: Dividend Calculation

How to calculate dividends becomes important
How to calculate dividends becomes important
After knowing the meaning of dividends and their types, here are some methods commonly used by companies to calculate dividends. How to calculate dividends becomes important after you know the meaning of dividends and their types if you want to start investing in stocks.

Meaning of Dividend Calculation of Dividend Payout Ratio (DPR)

Dividend Payout Ratio (DPR) is the ratio of how much of the company's profits are divided into dividends to shareholders.

Example:

Net profit of company. ABC is $1,000,000,000,-.

ABC decided to distribute dividends of $500,000,000 to shareholders.

DPR = 500,000,000 / 1,000,000,000 * 100% = 50%.

So, the Dividend Payout Ratio (DPR) from company. ABC is 50%.

Meaning of Dividend Calculation of Dividend Per Share (DPS)

Figures from the type of dividend calculation per share are obtained from the company's dividend distribution by the total number of shares.

Example:

ABC decided to distribute dividends of $500,000,000 to shareholders.

The total number of shares of company. ABC is 1 million pieces.

DPS = 500,000,000 / 1,000,000 = $500,-.

So, Dividend Per Share (DPS) or dividends per share received by shareholders is $500,-

Meaning of Dividends Dividend Yield Calculation

Dividend yield is a comparison of how much dividends the company distributes to the current stock price.

Example:

Dividend Per Share (DPS) from company. ABC is $500,-.

company. ABC is $10,000,-.

Dividend yield = 500 / 10,000 * 100% = 5%.

So, the dividend yield of company. ABC is 5%.

Choosing Mutual Funds as Investment

mutual funds as one type of investment
Mutual funds as one type of investment
After knowing the meaning of dividends which are the benefits of investing, you can use mutual funds as one type of investment. Mutual funds offer benefits as an option to strengthen your financial condition.

Another convenience offered by mutual funds is that they are easy to understand, making them suitable for attracting novice investors who want to know more about mutual funds. 

The various types of mutual funds also add to the options for investors to invest according to their individual wishes.

As an introduction, mutual funds are investment products in the form of a collection of funds that are managed as investment capital to be converted into various types of products. 

These types of products are also known as mutual funds, which include stocks, bonds, and other financial and investment products.

The collected funds are managed by the investment manager based on the type of mutual fund chosen by the customer. An investment manager is a management or professional institution whose job is to manage your investment activities, including mutual funds. 

This understanding of mutual funds is easy to understand, so it is a force to attract the attention of young investors or beginners to start investing.

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