Investing word of the day: Dividend

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source: http://shareinvestornz.blogspot.com 

A friend in an online forum posted a question regarding dividend and I would like to explain it further.

This is from the Philippines's Corporation Code under Batas Pambansa Bilang 68(Source: www.chanrobles.com)

Title IV: Powers of Corporations

Sec. 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n) 

In stock investing once a stock is traded in the stock market the company itself does have any power to control such that is why any stock has a market value. A stock's market value is dictated by how any sane investor values a company's stock and how willing one is to buy at such price. 

One might notice the likes of TEL(Philippine Long Distance Telecommunications) which has a par value of Php 5.00 but a market price of Php 2,736.00.

Source: http://technogra.ph
  

Now what is a dividend then?

source: http://www.etftrends.com

Though the company has no control on the price of issued stocks, one of the reasons why me and you buy stocks of such company is that we will profit from it. A company as stated in the Corporate law above has the power to declare dividends out of its unrestricted retained earnings. As an investor we look forward on returns from the company which we received in the form of dividends. 

So besides from the possible gain from price appreciation of a stock, me and you can hold onto the stock and wait for the company's dividends. 

The question now are the following:

1. How much is the dividend an in what form?

2. Who approves a company's dividend?

3. How often is the dividend?

4. How come some companies don't declare dividends?

Question number one:How much is the dividend an in what form?

As stated in the Corporate Law  a company can declare dividends up to its unrestricted retained earnings. What is "unrestricted retained earnings" you ask? If you have been browsing the PSE website and have downloaded any company's 17Q report you can check in the Equity section a caption entitled Retained Earnings. In simple terms it is the net income of the company accumulated over the years of its operations. The company can declare a cash dividend, a property dividend, or a stock dividend.

Question number two: Who approves a company's dividend?

The board of directors of the company approves the dividend declaration. In the case of a stock dividend a vote not less than 2/3 of outstanding capital stock is required to ratify such decision. The effect of stock dividend is only to increase the number of shares held by the shareholder but in the company's books only a transfer from Retained Earnings to the Capital stock occurred thus the market capitalization of the company remains the same. What one can gain from stocks arising from stock dividend is when such is sold in the new market price because it is as if you profited 100% from it.

Question number three:How often is the dividend?

Dividends are base on company's performance. If the company has performed well they can declare dividends and when not well there is a likelihood  that there will be no dividend. But remember what the Corporation law mentioned that is a company can declare dividends out of unrestricted Retained earnings. A company might suffered a loss in its operation  this year but if such has a positive retained earnings then the company can still declare dividends. Most companies declare once a year and some generous ones give 2 to 4 times a year

Question number four: How come some companies don't declare dividends?

Some companies don't declare dividends for the following reasons as stated in the corporate law:

1. When justified by definite corporate expansion projects or 

    programs approved by the board of directors

2.When the corporation is prohibited under any loan 

   agreement with any financial institution or creditor, 

  whether local or foreign, from declaring dividends without 

  its/his consent, and such consent has not yet been secured

3. When it can be clearly shown that such retention is 

   necessary under special circumstances obtaining in the 

  corporation, such as when there is need for special reserve 

  for probable contingencies.