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Sep 18 2013

How dividends work today

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     The main goal of any business is profit. Value of profits is also one of the key performance indicators of the company. However, the resulting company profit is not a profit of its owners (shareholders), as is often the company and shareholders it is a different legal (physical) persons. We will talk about the features of the distribution of profits and how dividends work today.

If based on results of a certain period the company received net profit the amount of such profit is considered as undivided profit. Undivided profits of the company are recorded in a separate account. The shareholders meeting or other governing body of the company may take a decision about the distribution of accumulated undivided profit wholly or partly and about the payment of dividends.

Definition of dividend.

What is dividend?

Dividend is a divided part of the company net profits that are paid to shareholders in cash or in another form. Dividends are paid in cash form most frequently.

The financial manager should do the following basic steps in planning, calculation and payment of dividends:

  1. To determine the amount of expected and actual net profits for the period. If the profit was not shared in earlier periods, it is necessary to take into account the amount of accumulated undivided profit, i.e. the sum of net profit of the current period and prior periods.
  2. To make recommendations to the shareholders (owners) about the possibility of profits distribution and payment of dividends. Payment of dividends may not be appropriate in cases when the company plans to increase assets by net profit to increase profitability in the future. Also unshared profit may be used for covering of uncovered losses of previous periods or for the formation of various reserves, that will be done dividend reinvestment.
  3. To calculate the amount of dividends per share (dividend rates) in the case of the decision to pay dividends. Manager must calculate the amount of dividends to each shareholder (co-owner), depending on its share in the capital structure. The amount of dividends after its definition and calculation is considered as company accounts payables to its owners.
  4. To plan the dividend payments schedule and dividends calendar (dividends dates). The financial manager should anticipate a sufficient amount of funds for payment of dividends on a certain date. When are dividends paid? Dividends are paid mostly after the reporting year or other period.

Dividend policy steps

         Payment of shareholder dividends is the last phase of the company economic cycle, because it carried out after all other major phases. Dividends are the positive factor for the shareholders, but their payment reduces the company’s assets. That is why the dividend policy of the company should be clearly weighed.

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