A declared dividend represents money that companies intend to pay to shareholders. The company has often not paid these dividends, noted by the word “declared.” Companies make these declarations as part of their financial reports and statements released quarterly or annually to shareholders. Declared dividends essentially represent a repayment of profits earned by a shareholder’s investment. Shareholders will often receive dividends based on the number of shares they own. The declared dividend statement will typically indicate a dollar amount per share given to investors.
Companies are not required to pay dividends as part of their agreement with shareholders. In some cases, only the holders of preferred stock will receive dividends. This is because preferred shareholders do not have voting rights. The dividend is the trade off for this class of shares.
Most companies list current dividend payments for preferred shares in a prospectus. These figures often represent historical dividends paid to shareholders, allowing future shareholders to determine if they desire preferred or common stock. Companies may also make statements that dividend payments are frequent or infrequent, as companies may only state a declared dividend when they have extra capital.
A declared dividend can be any dollar amount decided upon by a company’s management team. While many companies pay dividends on a quarterly basis, others opt for infrequent dividend payments to create more value for shareholders. For example, dividends are often pennies on the dollar. Unless a shareholder has several hundred or thousand shares, a declared dividend often means little in terms of income to shareholders. Companies that make infrequent dividend payments can then pay a dollar or more on shares, making the payments more meaningful to shareholders.
If a company makes an extremely high declared dividend per share, investors should be skeptical of the company’s intentions. In accounting terms, dividends reduce the amount of net profit a company retains. This figure, retained earnings, represents the amount of money a company can reinvest into its operations. Dividends, then, reduce a company’s ability to increase business operations and improve profit potential.
Some companies may pay out dividends to shareholders in order to repay these individuals in case of future profit problems. For example, a company that cannot pay dividends in the future may attempt to advance payments to shareholders. This allows the firm to retain shareholders until the very last moment, when the company may struggle to earn income.