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0 Introduction
When a publicly traded company earns a profit, it has the option of sharing its profits
with its shareholders through the payments of cash dividends. Many companies whose
shares trade in the stock market pay dividends to investors. Dividends are payments
Companies that earn a profit can either pay that profit out to shareholders; reinvest it in
the business through expansion, debt reduction or share repurchases, or both. When
part of the profit is paid out to shareholders, the payment is known as a dividend
(Jayaraman et al., 2004). The concept of dividends arose after companies were deemed
Dividend-bearing stocks are very popular among a wide variety of investors, so when a
company decides not to pay its dividend, it can be a signal to sell for many
shareholders. Those who own a stock primarily for the benefit of annual dividend
payments are most likely to abandon ship. However, even investors who employ a buy-
and-hold strategy may turn tail and run if a company that traditionally pays consistent
retained earnings, the management team decides some excess profits should be paid
out to shareholders (instead of being reinvested), the board approves the planned
dividend, the company announces the divided (the value per share, the date it will be
paid, the record date etc.), the dividend is paid to shareholders (Easterbrook,1984).
3.0 Types of dividends
There are various types of dividends a company can pay to its shareholders. They
include:
3.1 Cash: this is the payment of actual cash from the company directly to the
shareholders and is the most common type of payment. The payment is usually made
electronically (wire transfer), but may also be paid by a check or cash (in rare cases).
3.2 Stock: stock dividends are paid out to shareholders by issuing new shares in the
company. Just as with cash dividends, these are paid out pro rata based on the number
3.3 Assets: a company is not limited to paying distributions to its shareholders in the
form of cash or shares. A company may also payout other assets such as investment
3.4 Special: a special dividend is one that’s paid outside of a company regular policy
(i.e. quarterly, annual, etc.) and is usually the result of an excess cash build up.
3.5 Common: this refers to the class the shareholders (i.e. common shareholders), not
3.6 Preferred: this also refers to the class of shareholder receiving the payment.
Many investors like the steady income associated with dividends, so they will be more
likely to buy that company's stock. Investors also see a dividend payment as a sign of a