Dividends – Definition

Cite this article as:"Dividends – Definition," in The Business Professor, updated November 22, 2018, last accessed December 4, 2020, https://thebusinessprofessor.com/lesson/dividend-explained/.


Dividends Definition

Corporations distribute a part of their after-tax revenue among the shareholders of the company in accordance with the number and class of shares held. This distribution is known as a dividend.

A Little More on What are Dividends

The dividend can be paid by cash or as shares of stocks or any other property. The cash dividend is the most common form of paying the dividend. The Board of Directors determines and manages the dividend, but it must be reviewed and passed by the shareholders.

Publicly-held corporations generally pay dividends (if at all) on a quarterly basis. Smaller companies generally pay dividends yearly. Companies like Walmart Inc. and Unilever pay the dividend to its shareholders in each quarter.

Companies can declare non-recurring special dividends in addition to the regular dividend.

The profit made by a company is mostly utilized for ongoing and future business activities. A small portion of the revenue is generally distributed as the dividend. Sometimes, companies pay the dividend even when they have not made a sizable profit. They continue to give the dividend to maintain their regular dividend dispatch record.

The preferred stockholders get their dividend payment first. They normally receive at a fixed rate. The ordinary shareholders’ dividend depends on the revenue made by the company and its need for cash for future businesses.

Mutual funds and exchange-traded funds also pay dividends to its shareholders. Oil and gas, financial and bank, basic material, healthcare, and pharmaceuticals companies are proven to be the best dividend payers in the U.S.

The early stage startups or growth-stage companies have a high investment in technology and marketing generally do not pay a regular dividend. These companies need the revenue to build up business and expand the operations. So, it may not be a viable option for them to offer a regular dividend. The companies at the mid-stage of growth often restrain themselves from paying a dividend to use the profit money in the further development of the business.

References for Dividend


Academic Research on Dividend

  • ¬∑¬†¬†¬†¬†¬†¬† Dividend¬†policy, growth, and the valuation of shares, Miller, M. H., & Modigliani, F. (1961). the Journal of Business,¬†34(4), 411-433. The authors of this paper seek to fill in the gap between theoretical and empirical, real-world stock price valuation. The analysis begins with a model depicting an ideal economy that‚Äôs used to find share price. From there, the authors tackle the practical hurdles that reduce the accuracy of models such as what investors really capitalize assumptions of certainty, and market imperfections.
  • ¬∑¬†¬†¬†¬†¬†¬† The investment opportunity set and corporate financing,¬†dividend, and compensation policies, Smith Jr, C. W., & Watts, R. L. (1992).¬†Journal of financial Economics,¬†32(3), 263-292. This paper examines how corporate policy decisions can be influenced by different styles of firms. The authors assert that compensation and contracting theories effect the nature and valuation variables of a firm more than previously believed.
  • ¬∑¬†¬†¬†¬†¬†¬† Dividend¬†yields and expected stock returns, Fama, E. F., & French, K. R. (1988). Journal of financial economics,¬†22(1), 3-25. Using statistical regression, the authors use dividend yield to predict stock returns. A two-part explanation takes into account return variances, market shocks, and future price increases when forecasting stock returns.
  • ¬∑¬†¬†¬†¬†¬†¬† Dividend¬†policy under asymmetric information, Miller, M. H., & Rock, K. (1985). The Journal of finance,¬†40(4), 1031-1051. This research uses a standard finance model of a firm‚Äôs dividend/investment/financing decisions to see what would happen when the firm‚Äôs management knows more about the firm‚Äôs current earnings than the general public. This research finds that the public will operate as if the firm is following the Fisher rule, while the firm‚Äôs managers will be incentivized to violate the same rule. The pros and cons of operating in this manner are considered and analyzed.
  • ¬∑¬†¬†¬†¬†¬†¬† The¬†dividend¬†puzzle, Black, F. (1976). Journal of portfolio management,¬†2(2), 5-8. This analysis behind the theory and practice of dividends offers an illuminating look for beginners and advanced students alike. The author examines many of the commonly held beliefs about corporate dividends as both incentives and forecasting tools, while adding his own theories about the meaning of these financial tools.
  • ¬∑¬†¬†¬†¬†¬†¬† The¬†dividend-price ratio and expectations of future dividends and discount factors, Campbell, J. Y., & Shiller, R. J. (1988).¬†The Review of Financial Studies,¬†1(3), 195-228. This technical analysis uses historical data from large periods of time to examine the correlation of dividends and stock prices. Four different version of a linearized model take into account real discount rates, consumption data, and rates of return to create a metric that judges the relative importance of dividend growth and discount rates.
  • ¬∑¬†¬†¬†¬†¬†¬† Growth, beta and agency costs as determinants of¬†dividend¬†payout ratios, Rozeff, M. S. (1982).¬†Journal of financial Research,¬†5(3), 249-259. This paper presents a model of optimal dividend payouts to show that investment policy influences dividend policy. A cross-sectional test of the model relates dividend payout to equity held by insiders, revenue growth, the firm‚Äôs beta coefficient, and the number of common stockholders.
  • ¬∑¬†¬†¬†¬†¬†¬† Agency problems and¬†dividend¬†policies around the world, La Porta, R., Lopez‚Äźde‚ÄźSilanes, F., Shleifer, A., & Vishny, R. W. (2000). The journal of finance,¬†55(1), 1-33. This paper employs a cross-section of 4,000 companies from 33 countries with different levels of minority shareholder rights to test two agency models of dividends, the ‚Äúoutcome model‚ÄĚ and the ‚Äúsubstitution model.‚ÄĚ The resulting test of these models supports the theory that dividends are paid because minority shareholders pressure the firm to release cash.
  • ¬∑¬†¬†¬†¬†¬†¬† Quarterly¬†dividend¬†and earnings announcements and stockholders’ returns: An empirical analysis, Aharony, J., & Swary, I. (1980). The Journal of Finance,¬†35(1), 1-12. This paper uses empirical data to test some of the most commonly held ideas about quarterly dividends and earnings announcements being used as signaling devices to shareholders. Because dividend and earnings announcements are closely synchronized, the authors attempt to find a way to discern the subtle differences in information that each announcement can offer.
  • ¬∑¬†¬†¬†¬†¬†¬† Dividend¬†announcements: Cash flow signalling vs. free cash flow hypothesis?, Lang, L. H., & Litzenberger, R. H. (1989).¬†journal of Financial Economics,¬†24(1), 181-191. The authors use Tobin‚Äôs Q ratio to designate over investors while testing the cash flow signaling and free cash flow explanations of dividend announcements on stock prices. This study finds that the average returns of firms announcing large dividends are greater with firms who have a Q ratio of less than unity.
  • ¬∑¬†¬†¬†¬†¬†¬† Simultaneous determination of insider ownership, debt, and¬†dividend¬†policies, Jensen, G. R., Solberg, D. P., & Zorn, T. S. (1992).¬†Journal of Financial and Quantitative analysis,¬†27(2), 247-263. This paper examines three different policy choices to analyze a hypothesis regarding the cross-sectional differences in insider ownership, debt, and dividend policies. The empirical results support the hypothesis that levels of insider ownership differ across firms, and that firms with high levels of insider ownership often choose lower levels of both debt and dividends.
  • ¬∑¬†¬†¬†¬†¬†¬† Tax-induced trading around ex-dividend¬†days, Lakonishok, J., & Vermaelen, T. (1986). Journal of Financial Economics,¬†16(3), 287-319. This paper takes a look at the reasons behind the increased volume of stock trading that occurs on or around ex-dividend days. The results of the study are consistent with the hypothesis that asserts that short-term traders have an impact on ex-day price behavior for stocks.

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