How Does A Company Decide The Payment To Its Shareholders

Why do we invest in share market or purchase shares of any public company? While investing, why do we cautiously select for shares which are consistent and yielding? There is no hidden agenda in this; the reason is to ensure profit from the shares. Now, it will be interesting to know how we get our due from the company in which we invested. Like every professionally-operated business process, here also there is a systematic system for calculating our payouts.

The cash or income which we obtain from the concerned company is called dividend. The dividend can reach us in two ways; either as the entire profit earned by the company or a portion of it, devoid the amount retained by the company. The dividend we receive for our investment depends on the performance of the shares, the company sales and also the company policies. The percentage varies between the companies and among the industries. For example, for a share worth $1000, the dividend paid by a software firm may be $100, whereas a pharmaceutical company may pay you $75. The factors acting to create this difference include the policies of the companies, the net income, tax relaxations, import and export expenses, regulatory expenses etc. Therefore, it is right to compare industries operating in the same sector for their dividends, while selecting the share for investing.

Dividend forms the basis for our percentage earning

The percentage of the earnings paid to us by the company is calculated by finding the dividend payout ratio. It is the proportion of the complete chunk of dividends compensated to all the shareholders in the specified period to the company earnings from these shares during the same time period. Usually, calculations are done on a yearly or quarterly basis and paid out in the same manner. This can also be defined in terms of the ratio of the total dividend amount be remunerative to the net income of the company. Dividend payout ratio can be represented as:

Total dividend per share in year/Earnings per share received by the company.

The ratio gives the percentage of the company earnings you receive for the investment you made by purchasing its shares. If the company decides to retain some portion of the dividend with themselves, this fund is usually utilized to expand the company, pay off debts or divert towards emergency funds. It is an unwritten trend that older and stable companies usually give larger dividends, while the younger ones at the initial growing stages may retain more of the earnings, even if the amount is higher.