When an investor buys company shares, he is essentially purchasing the right to part-ownership of the company. Therefore, if the company makes profit, he should be able to receive a portion of this, depending on how many shares he owns. A dividend is a payout issued by the corporation equivalent to the portion of profit an investor should receive. Dividends are usually paid out regularly, usually on a quarterly basis.
There are various kinds of dividends. Perhaps the most common and familiar is the cash dividend. Despite the name, this is rarely paid out in cold cash. Usually, payments are issued with the use of electronic funds transfer or by check. An amount to paid out per share owned is declared by the company, and shareholders receive an amount based on how much they own.
On the other hand, stock or scrip dividends may also be issued. These are additional shares which are also usually issued based on the proportion of shares which belong to the investor. Unless the shares issued are those of the company’s subsidiaries, the stocks issued could come from a dilution of the existing stock. This means that shares are increased, resulting in the decrease in value of each share.
While corporations do distribute profits by paying dividends to investors, this does not mean that the entire profit goes to dividend payouts. Oftentimes, part of the profit is kept by the company for purposes of re-investment. While many investors purchase stocks in order to receive dividends, there are also others which prefer to invest in companies which re-invest a substantial percentage of their profit, as this tends to increase the company’s value.