When a stock market listed company has reached a sufficient level of maturity and scale that it is generating reliable revenue, profit and, crucially, cash flow it may decide to start paying dividends to its shareholders.
Paying a dividend is a way of rewarding shareholders’ faith and is also a show of confidence in the future prospects of a business.
Typically companies pay dividends twice a year, although some firms pay dividends on a quarterly basis. The details are usually announced alongside first half and full year results.
This includes a timetable of when the dividend will be paid, the most important thing to focus on is the ex-dividend date. If you want to receive the dividend you need to hold the shares before this point. The subsequent payment date could be weeks or even months into the future.
Funds, which themselves receive income from the underlying assets they invest in, can also pay dividends. Some funds pay dividends on a monthly basis.
Nearly always you will get your dividend in cash, however on rare occasions a company might pay a so-called ‘scrip’ dividend which sees payment offered in new shares.
This might be because the company is short of cash to pay the dividend with. During the recent oil price crash, for example, BP (BP.) and Royal Dutch Shell (RDSB) paid scrip dividends.
Crucially, you need to remember that companies (or funds) are under no obligation to pay dividends and are free to scale them back, or even cancel them all together if their circumstances change.
