Ordinary dividends

Definition

Ordinary dividends are the most common type of cash distributions paid to shareholders from a company's earnings. These payments typically represent a portion of the company’s profits that is distributed to shareholders as a return on their investment. Ordinary dividends are usually declared on a regular basis, such as quarterly or annually, and are subject to taxation at the individual shareholder's tax rate.

5 Must Know Facts For Your Next Test

1. Ordinary dividends can vary in amount and frequency depending on the company's profitability and dividend policy.
2. Companies may choose to increase, decrease, or eliminate ordinary dividends based on their financial performance and future investment needs.
3. Dividend payments can be made in cash or in additional shares of stock, but cash dividends are the most common form.
4. Shareholders must own the stock before the ex-dividend date to qualify for receiving ordinary dividends.
5. Ordinary dividends are reported on Form 1099-DIV for tax purposes, and they are taxed as ordinary income for shareholders.

Review Questions

• What factors might influence a company's decision to declare ordinary dividends, and how can this impact investors?
  • A company’s decision to declare ordinary dividends can be influenced by factors such as its profitability, cash flow, and overall financial health. Companies often aim to maintain or grow their dividend payouts as a signal of financial stability to attract and retain investors. If a company faces financial challenges and decides to reduce or eliminate its ordinary dividends, it could lead to a decline in investor confidence and negatively impact the stock price.
• Compare and contrast ordinary dividends with preferred dividends in terms of payment priority and characteristics.
  • Ordinary dividends are paid to common shareholders and do not have a fixed rate, meaning they can fluctuate based on the company's earnings. In contrast, preferred dividends are paid to preferred shareholders first and typically at a fixed rate, giving them priority over ordinary dividends during distribution. This means if a company is struggling financially, preferred shareholders receive their dividends before any payments are made to ordinary shareholders.
• Evaluate how changes in ordinary dividend policies can reflect broader economic trends and investor sentiment.
  • Changes in ordinary dividend policies can serve as indicators of broader economic trends. For instance, when companies increase their ordinary dividends during an economic upturn, it often reflects confidence in future growth and profitability. Conversely, if many companies start cutting their ordinary dividends during an economic downturn, it could indicate weakening financial conditions and lower investor sentiment. This trend can lead to a shift in investment strategies as investors seek more stable income sources during uncertain times.

Related terms

preferred dividends: Preferred dividends are payments made to preferred shareholders, which typically have priority over ordinary dividends in terms of payment and often come with a fixed dividend rate.

dividend yield: Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price, expressed as a percentage.

retained earnings: Retained earnings refer to the portion of net income that is not distributed as dividends but is instead reinvested in the company for growth and expansion.