Suppose your annual dividend comes to $ 1 per share, you may either get a one dollar check per share once a year or a check of $0.25 per share every quarter. Going by the dividend per share, the amount appears insignificant, but it becomes quite substantial and attractive if you hold a large number of shares. Those shareholders who buy thousands of shares when the IPO of the company is issued stand to gain a lot from the dividend payments. It becomes quite a sizeable part of your regular income and as the company grows and so does the value of your stock holding.



Most successful companies especially the blue chip companies regularly pay dividends to their shareholders. In fact payment of dividend becomes their Unique Selling Preposition--USP. Quite a few stock investors choose to invest in certain companies simply because they pay dividends quarter after quarter or year after year.

Blue chip companies like Coca Cola, Wal-Mart and McDonald are among many such companies that pay dividends to their investors on yearly or quarterly basis. People invest in the stocks of such companies even though they are aware that their stocks are over valued. The investors happily forget in course of time that they purchased their stock at higher prices.

Companies pay dividends in form of cash as well as in stock. Sometimes the companies invest their profits into other channels or do not have sufficient cash reserve since it stands in form of receivables in company's balance sheet. They, therefore, pay the dividend in form of shares.

Another reason why the companies pay dividend in form stock is that they wish to lower the price of their stock on per share basis to encourage more trading and promote more liquidity (which means how fast an investor can convert his shares into cash). The question may arise - how does the lowering the price of the stock increase its liquidity? The answer is that most people prefer to buy low priced stocks rather than high priced stocks. You are more likely to invest in a $10 share than in a $100 share.

Sometimes the cash dividend paid per share is also usually converted into shares. Each dividend per share can only be converted into a fraction of a share since the shares are costly. But, if as already said, if you own thousands of shares, you stand to gain large number of extra shares. It is quite apparent that your holding in the company increases by the number of shares you get as dividend.

How is dividend distributed?

The concept of dividend payment can be explained by a practical example.

Suppose a company has 100 shares of common stock. It has five shareholders. Each shareholder owns 20 shares. Suppose further that the market price of each share is $50. This means the total capital value of the company's stock is 50x100=$5,000.

Now the company decides to issue 20% of the stock as dividend. The company creates 20 shares to its 5 shareholders. Each of the 5 shareholders gets 4 shares as dividend.

Now the stock of the company grows 120 shares and each investor now owns 24 shares in place of 20 that he earlier had.

It must be noted that while the total value of each shareholder's stock of 20 shares was 20x50= $1,000 before the dividend was issued; the total value of his 24 shares still remains $1,000. Evidently the value of its stock has now decreased. The price of each share now stands at (1,000 divided by 24) $ 41.66 in place of $50 earlier. The total market capitalization of the company also stands unchanged at $5,000.

Now an important question arises as to how the investor gains in terms of the value of his stock holding which remains the same when the dividend is announced. The answer to this is that he gains in two ways. First, the value of the stock is bound to grow over the time. Secondly, present stock will increase further when the next dividend is announced possibly next year.