One of the most frequently asked questions in Advantexe’s business simulation-centricworkshops is, “Can you explain the impact of giving or not giving dividends?”

To help participants in our Business Acumen programs I wrote this blog that I am pleased to share with our blog and business community. I start the blog with a definition of what a dividend is and then share insights about the impact of the dividend on a company and its shareholders.

What is a Dividend?

A dividend is a way to share a portion of a company's profits with its shareholders. Shareholders have trusted a company with their capital (cash) and if a company does well, there is an obligation to share the success with the shareholders who gave the company the cash to do business.

The distribution of dividends is typically a big deal and is approved by the Board of Directors. Dividends are often paid quarterly, and sometimes instead of cash, dividends are given in additional Stock.

One of the most important metrics of success when it comes to a dividend is something called the “dividend yield.” The dividend yield is calculated by dividing the actual dividend by the current stock price. For example, if the annual dividend is $10 ($2.50 per quarter) and the stock price is $200 per share, the dividend yield is $10 divided by $200 which equals 5%. That, of course, is over and beyond the increase (or decrease in the value of the stock). A blog for another day is the concept of Total Shareholder Return (TSR) which looks at the increase/decrease of the value of the stock plus the added value of the dividends.

For investors, dividends can provide a steady stream of income and can also be a sign of a company's financial health. For example, retirees who have invested in a portfolio of stocks that give regular dividends may actually live off of their quarterly dividend disbursements without having to tap into other savings or selling off the actual stocks.