What is a Dividend?

In the simplest terms, a dividend is a payment made by a company to its shareholders. It represents a portion of the company's profits that do not go towards reinvestment for the company's needs. Instead, it is a benefit paid to the stock holders, generally in proportion to the number of shares of stock owned. In other words, companies that pay a dividend to its shareholders generally pay an amount per share. The more stock someone holds in a particular company, therefore, the more he or she will receive in dividend payments. Dividends are paid out in an assortment of ways. Some companies send cash to their shareholders, often on a fixed schedule, such as every quarter. Other companies make a dividend payment in the form of stock shares, or even store credits, particularly among companies that specialize in retail sales.

Dividends as a Reward to Shareholders

There are also companies that pay dividends to shareholders according to the stock holders' level of activity. Cooperatively owned companies often function this way to ensure that members have an incentive to maximize the company's success. Publicly held companies, generally, make dividend payments regularly to stock holders. Often, they function as an indirect form of reinvestment in the company through a system of options in stock packages. If the profits from dividend payments are used to buy more stock in the company itself, it could benefit both the company and the shareholder. The company benefits because the increased demand raises the price of the stock, and the shareholder benefits because he ends up with more shares of a stock at a higher price.

Stock Holders and Dividends

Although dividend payments can serve as regular benefits to shareholders, the practice is not without controversy. Some economists believe that company profits are best used as reinvestment into the company in the form of research and development or capital reinvestment. There are also questions of double taxation on the same money when a dividend is paid because the company may have already paid an income tax on the profits from with the dividend comes, and then the shareholder is charged income tax again on the money received in the form of the dividend. Indeed, many shareholders themselves believe that their bottom line would be better served by having the company reinvest the profits than redistribute the funds to shareholders. If a company is bringing in a high return on investment, stock holders often prefer to keep the profits at their maximum level through reinvestment at the high rate of return. In addition, the reinvestment will grow the company, increasing the value of its stock, which often benefits shareholders more then a dividend payment.