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Financial Terms Related to Dividend

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  1. 1. Financial Terms related to Dividend This document is part of the valuable contents available at www.ftpall.com, a free onlineglossary with more than five thousand financial and business terms. This document can be copied and distributed freely Find thousands of financial terms at www.ftpall.com respecting its original format. It is forbidden its transcription, translation or change on its format without authorization of its author or editor.DIVIDENDAverage dividend yield • Combined with price appreciation, the average dividend yield (if any) can show a potential total return from a security investment. The formula for the average dividend yield is: (EPS *Average Payout) / current price where EPS = Estimated Future High EPS / (1 + EPS Growth) 2.5 Companies that pay a dividend will generally increase the dividend as EPS grow. Share price growth will usually follow the dividend increases, and thus keep dividend yield at a constant percentage.Cash dividend • A dividend paid in cash to a companys shareholders. The amount is normally based on profitability and is taxable as income. A cash distribution may include capital gains and return of capital in addition to the dividend.
  2. 2. www.ftpall.com 2|Page • Money paid to a corporations stockholders, normally out of the corporations current earnings or accumulated profits. All dividends must be declared by the board of directors. Dividends are taxable as income to the shareholders.Common dividends • Newer companies growing rapidly may pay no or only a modest dividend, preferring to reinvest their profits in order to grow the business. More established companies often pay a dividend quarterly. See also: Dividends.Constant growth dividend valuation gordon model Find thousands of financial terms at www.ftpall.com • Assumes that the value of a share of stock equals the present value of all future dividends (assumed to grow at a constant rate) that it is expected to provide over an infinite time horizon. The model assumes that dividends will grow at a rate that is less than the required rate of return.Constant payout ratio dividend policy • A dividend policy based on the payment of a certain percentage of earnings to owners in each dividend period.Cum dividend • With dividend.Cumulative dividend feature • A requirement that any missed preferred or preference stock dividends be paid in full before any common dividend payment is made.Date of record dividends • The date, set by the firms directors, on which every person whose name is recorded as a shareholder will, at a specified future time, receive a declared dividend.Discounted dividend model
  3. 3. www.ftpall.com 3|Page • Abbreviated DDM. A formula to estimate the intrinsic value of a firm by figuring the present value of all expected future dividends.Dividend • Dividends may be paid in the form of cash or stock. Generally a growth company pays out no more than 50% of its earnings in dividends to shareholders. When a company has been growing rapidly over several years, it is likely to pay a modest dividend so that it can reinvest earnings in the business. In this way it will build value over the long term. Find thousands of financial terms at www.ftpall.com Dividends are paid to two kinds of shareholders. Preferred dividends are paid at a specified rate to shareholders who have purchased preferred shares. Should the company be in financial difficulty, the preferred shareholders would receive their due before the common shareholders. Common shareholders may or may not receive a dividend. It depends upon the wishes of the Board of Directors. If a company has a history of paying dividends, it will likely continue to do so. If the dividend is cut, the stock price is likely to fall. See also: Common Dividends. • A dividend is a portion of a companys profit paid to common and preferred shareholders. A stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5%. • The amount distributed to stockholders from a company s net profit.Dividend clawback • With respect to a project financing, an arrangement under which the sponsors of a project agree to contribute as equity any prior dividends received from the project to the extent necessary to cover any cash deficiencies.Dividend clientele • A group of shareholders who prefer that the firm follow a particular dividend policy.
  4. 4. www.ftpall.com 4|Page For example, such a preference is often based on comparable tax situations.Dividend date • Is sometimes used to refer to the Date of Record for entitlement to the dividend or the actual Payment Date.Dividend discount model • Abbreviated DDM. A model for valuing the common stock of a company, based on the present value of the expected cash flows. Find thousands of financial terms at www.ftpall.comDividend growth model • A model wherein dividends are assumed to be at a constant rate in perpetuity.Dividend irrelevance theory • A theory put forth by Miller and Modigliani that, in a perfect world, the value of a firm is unaffected by the distribution of dividends and is determined solely by the earning power and risk of its assets.Dividend limitation • A bond covenant that restricts in some way the firms ability to pay cash dividends.Dividend or dividends • Refer to distributions made by a corporation to its shareholders. The shareholders can be common or preferred. Dividends are usually paid in cash. However, dividends are sometimes paid in stock. There have been situations where the dividend was paid in product or a processed good such as a precious metal.Dividend payout ratio • Percentage of earnings paid out as dividends. • Is computed by dividing the dividends paid on common shares by the net income which would be available for common stockholders.
  5. 5. www.ftpall.com 5|Page • A measurement of the percentage amount of net income paid out in dividends rather than retained by the business to help it grow. Recent payout figures higher than 50% (and higher than the average payout) may forewarn of a dividend cut. This cut may result in the stock price falling. Sometimes, although the dividend payout is more than earnings, the company has strong cash flow and can cover the dividend. However, a company paying out dividends in excess of earnings on a recurring basis is a risky investment. • Indicates the percentage of each dollar earned that is distributed to the owners in Find thousands of financial terms at www.ftpall.com the form of cash; calculated by dividing the firms cash dividend per share by its earnings per share.Dividend policy • The firms plan to be followed when making the dividend decision. • An established guide for the firm to determine the amount of money it will pay as dividends.Dividend rate • The fixed or floating rate paid on preferred stock based on par value.Dividend reinvestment • Occurs when a dividend paying organization such as a corporation or mutual fund automatically reinvest the payable dividend into additional shares of that organization. There can be tax implications for this activity.Dividend reinvestment plan • Abbreviated DRP. Automatic reinvestment of shareholder dividends in more shares of a companys stock, often without commissions. Some plans provide for the purchase of additional shares at a discount to market price. Dividend reinvestment plans allow shareholders to accumulate stock over the Long term using dollar cost averaging. The DRP is usually administered by the company without charges to the
  6. 6. www.ftpall.com 6|Page holder. • Abbreviated DRIP or DRP. Plan offered by many corporations for the reinvestment of cash dividends by purchasing additional shares or fractional shares on the dividend payment date, occasionally at a discount from market price. Many DRIPs also allow the investment of additional cash from the shareholder, known as an Optional Cash Payment or Optional Cash Purchase (OCP). The DRIP is usually administered by the company without charges or only nominal fees to the participants, and many allow additional purchases of as little as $10. Find thousands of financial terms at www.ftpall.com • Plans that enable shareholders to use dividends received on the firms shares to acquire additional full or fractional shares at no transaction (brokerage) cost.Dividend relevance theory • The theory, attributed to Gordon and Lintner, that shareholders prefer current dividends and that there is a direct relationship between a firms dividend policy and its market value.Dividend rights • A shareholder rights to receive per-share dividends identical to those other shareholders receive.Dividend valuation model • Abbreviated DVM. The value of common shares is dependent upon the sum of the present value of the dividends received over an infinite time horizon.Dividend yield • Is a term that can have several different meanings. It can refer to an annualized (cash) dividend rate of return. This is computed by dividing the cash dividend by the price per share at the time of purchase. If the stock were trading at 100 and the dividends equaled $2.80, then the yield would be 2.80 percent. Also, the term is used on the assumption that the current trading price is the implied purchase price.
  7. 7. www.ftpall.com 7|Page The computation process remains the same. • The dividends per share paid to shareholders, expressed as a percentage of the share price. Total return on your stock investment is usually measured by adding the dividend yield percentage to the percentage return from price growth of the stock.Dividend yield funds • Indicated yield represents return on a share of a mutual fund held over the past 12months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not redemption charges. Find thousands of financial terms at www.ftpall.comDividend yield stocks • Indicated yield represents annual dividends divided by current stock price.Dividends • Periodic distributions of earnings to the owners of stock in a firm paid only at the discretion of the board of directors.Dividends per share • Dividends paid for the past 12 months divided by the number of common shares outstanding, as reported by a company. The number of shares often is determined by a weighted average of shares outstanding over the reporting term.Ex dividend • This literally means without dividend. The buyer of shares when they are quoted ex-dividend is not entitled to receive a declared dividend. • Period beginning two business days prior to the date of record during which a stock will be sold without the right to receive the current dividend. • Refers to a transaction which the new purchaser of a stock is not entitled to the recently declared dividend. This occurs because the new purchaser did not own the security on the record date.
  8. 8. www.ftpall.com 8|PageEx dividend date • Also known as the Ex-Date. The first date on which a security is traded without entitling the buyer to receive distributions previously declared. This is the date after which the seller, and not the buyer, of a stock will be entitled to a recently announced dividend. It is usually several business days before the record date, and is indicated in newspaper listings with an x. • The first day of trading when the seller, rather than the buyer, of a stock will be entitled to the most recently announced dividend payment. This date set by the Find thousands of financial terms at www.ftpall.com NYSE (and generally followed on other US exchanges) is currently two business days before the record date. A stock that has gone ex-dividend is marked with an x in newspaper listings on that date.Extra dividend • An additional dividend optionally paid by the firm if earnings are higher than normal in a given period. • Is a payment declared or paid by a corporation in addition to its ordinary dividend policy. It can reflect a distribution of profits which are considered extraordinary.Extra or special dividends • A dividend that is paid in addition to a firms regular quarterly dividend.Homemade dividend • Sale of some shares of stock to get cash that would be similar to receiving a cash dividend.Indicated dividend • The total dividends that would be paid on a share of stock in the next twelve months, provided that each dividend is the same amount as the latest payment. • Total amount of dividends that would be paid on a share of stock over the next 12
  9. 9. www.ftpall.com 9|Page months if each dividend were the same amount as the most recent dividend. Usually represent by the letter e in stock tables.Intercorporate dividends • a) Dividends received on common and preferred stock held in other corporations. They are included in income for tax purposes, but if they are received from a taxable Canadian corporation, the full amount of the dividend is not taxable and can flow through the receiving company to their shareholders without tax consequences. This avoids the triple taxation; b) Dividends received by a corporation from investments in Find thousands of financial terms at www.ftpall.com common and preferred shares held in other corporations.Liquidating dividend • Payment by a firm to its owners from capital rather than from earnings.Low regular and extra dividend policy • A dividend policy based on paying a low regular dividend, supplemented by an additional dividend when earnings are higher than normal.Ordinary dividend • Is a payment declared or paid by a corporation. It reflects the recently established or declared amount. It is not expected to be a one-time or special declaration.Perfect market view of dividend policy • Analysis of a decision on dividend policy, in a perfect capital market environment, that shows the irrelevance of dividend policy in a perfect capital market.Potential average dividend yield • Suggests the potential percentage dividend payments, compounded yearly over the next 5 years. Combined with price appreciation, Yield makes up the possible total return percentage.Preferred dividends
  10. 10. www.ftpall.com 10 | P a g e • These dividends are paid at a specified rate to shareholders who have purchased preferred shares. Should the company be in financial difficulty, the preferred shareholders would receive their due before the Common Shareholders. Preferred dividends are used as part of the business model method of predicting EPS 5 years into the future.Price dividend will support • A company with a large dividend yield will have substantial price support. A large dividend yield is anything larger than the bank interest rate. Find thousands of financial terms at www.ftpall.comRegular dividend policy • A dividend policy based on the payment of a fixed-dollar dividend in each period.Residual dividend approach • An approach that suggests that a firm pay dividends if and only if acceptable investment opportunities for those funds are currently unavailable.Residual theory of dividends • A theory that the dividend paid by a firm should be the amount left over after all acceptable investment opportunities have been undertaken.Signaling view on dividend policy • The argument that dividend changes are important signals to investors about changes in managements expectation about future earnings.Small ordinary stock dividend • A stock dividend that represents less than 20 to 25 percent of the common stock outstanding at the time the dividend is declared.Special dividend • Also referred to as an extra dividend. Dividend that is unlikely to be repeated.
  11. 11. www.ftpall.com 11 | P a g eStock dividend • The payment to existing owners of a dividend in the form of stock. • A payment of additional stock to shareholders, rather than a cash dividend. Such payment increases the number of shares held but does not alter a shareholders proportional investment in the company. • Payment of a corporate dividend in the form of stock rather than cash. The stock dividend may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders. Stock dividends are often used to Find thousands of financial terms at www.ftpall.com conserve cash needed to operate the business. Unlike a cash dividend, stock dividends are not taxed until sold.Substitute cash or dividend payment • Occurs when there has been a short sale. The lender of the security is entitled to a substitute dividend or cash payment. The party who buys the actual security is entitled to the actual dividend as well as voting rights, if any.Target dividend payout ratio • A policy under which the firm attempts to pay out a certain percentage of earnings as a stated dollar dividend, which it adjusts toward a target payout as proven earnings increases occur.Tax differential view of dividend policy • The view that shareholders prefer capital gains over dividends, and hence low payout ratios, because capital gains are effectively taxed at lower rates than dividends.Traditional view of dividend policy • An argument that within reason, investors prefer large dividends to smaller dividends because the dividend is sure but future capital gains are uncertain.
  12. 12. www.ftpall.com 12 | P a g eWith dividend • Purchase of shares in which the buyer is entitled to the forthcoming dividend. Related: ex-dividend. Find thousands of financial terms at www.ftpall.com