What is a Dividend?
Dividend Channel Staff
Often times, a company will reward its shareholders by paying out a portion of its profits in the form of a dividend rather
than retaining those earnings for investment in the company. For publicly traded companies, dividends are usually paid on a
fixed schedule (monthly, quarterly, semi-annually and annually) and the total amount you receive is based on the number of
shares you own prior to the record date. Furthermore, the dividend can be paid in cash or re-invested back into the company
through a Dividend Re-Investment Plan (DRIP) — sometimes at a discount to the current stock price if the company offers
that kind of plan (otherwise, your brokerage will just make an open-market purchase using the cash you received).
In certain cases, a company may choose to pay a stock dividend, i.e. instead of cash some or all of the dividend may be paid
by issuing new shares. This allows the company to hold onto its cash, but depending on the tax characteristics of
the dividend shareholders may owe taxes to the government on that income, even though no actual cash was received. During the
height of the financial crisis, many Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs) made
dividend payments in stock rather than cash, because both of those types of companies are required to pay out most of their
earnings to shareholders in the form of dividends.
Dividends are also important in valuing a company's stock. Finance professor Myron Gordon popularized an approach known as
the ''Dividend Discount Model'' in his book ''The Investment, Financing and Valuation of the Corporation.'' This approach
looks at the current dividend and expected future dividends anticipated to be paid in the future, and combines the current
value of all that combined cash. Because a dollar in hand today is worth more than a future dollar (things tend to cost more
in the future on account of inflation), the future expected payments are ''discounted'' in the calculation (hence the term
Dividend Discount Model).
A company whose dividend payments tend to go up over time, keeping up with (or surpassing) the rate of inflation, should tend
to be more attractive and interesting for dividend investors to consider. That's why at Dividend Channel we pay particular
attention to dividend history, dividend yield, book value, and quarterly earnings (only profitable
companies can afford to pay dividends) when we calculate our DividendRank as part of our
dividend stock screener where we screen through our entire coverage universe of dividend paying stocks,
and come up with certain calculations about profitability and about the stock's valuation (whether we think it looks ''cheap''
or ''expensive''). The coverage universe is then ranked based upon our proprietary criteria, and the result is a list of the
top most ''interesting'' stocks at any particular time — a unique research tool for use by dividend investors.