Earnings that are not retained by a company may be distributed. The distribution may be in the form of a cash or stock dividend. A company by paying a cash dividend reduces the financial resources available to it by the amount of the distribution.
Alternatively, in the case of a stock dividend, there would be more shares in circulation for the same amount of shareholder equity.
The amount of the dividend is determined every year at the company's annual general meeting, and declared as either a cash amount or a percentage of the company's profit. The dividend is the same for all shares of a given class (e.g. preferred shares). Once declared, a dividend becomes a liability of the firm.
When a share is sold shortly before the dividend is to be paid, the seller rather than the buyer is entitled to the dividend. At the point at which it is the buyer is no longer entitled to the dividend if the share is sold, the share is said to go ex-dividend. This is usually a few days before the dividend is to be paid, depending on the rules of the stock exchange. When a share goes ex-dividend, its price will generally fall by the amount of the dividend.
The dividend is calculated mainly on the basis of the company's unappropriated profit and its business prospects for the coming year. It is then proposed by the Executive Board[?] and the Supervisory Board[?] to the annual general meeting. At most companies, however, the amount of the dividend remains constant. This helps to reassure investors, especially during phases when earnings are low, and sends the message that the company is optimistic with respect to its future performance.
Some companies have dividend-reinvestment plans. These plans allow shareholders to use dividends to systematically buy small amounts of stock often at no commission. Dividends are not yet paid in gold certificates although this idea has been discussed by mining companies such as Goldcorp.
An alternative to dividends is a stock buyback[?]. In a buyback the company buys back stock, thereby increasing the value of the stock left outstanding. In recent years this alternative has become more popular in the United States because investors generally have to pay more in income tax on dividends than they would in capital gains tax[?] on an increase in the value of their stock.
See also Dividend tax.