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What are Cash Dividends and Its Benefit

03 Oct 2023


Dividends refer to additional payouts a company makes to its shareholders. These payouts are distributed from the profits it earns through cash dividends or stock dividends

Cash dividends, in particular, are an essential investing factor, and understanding how they work can give investors valuable insights. 

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What is a cash dividend?

Cash dividends are paid out to investors by companies on a per-share basis. As the name suggests, their mode of transfer is cash. 

The company’s senior management or board of directors determines the amount and frequency of dividend payments. You will receive them periodically, like monthly, quarterly, etc.

Cash dividends serve as a supplement to regular income for many individuals. But, it is essential to note that all companies do not pay cash dividends. Companies sometimes share profits on a large contract settlement or any other special non-recurring event. 

If you want to earn income through cash dividends, search for companies with a history of paying cash dividends and financial solid health regarding debt ratios, cash flows, etc. 

How do cash dividends work?

When you own the shares of a company, and it decides to distribute its profits with you, it sends you a cash dividend. For example, if a company is doing well and growing financially with significant profits, it can give its investors a portion of its earnings. This portion is the cash dividend. 

The company’s board of directors announces the dividend payment you will receive for every share you own. So, if company XYZ announces to pay Rs. 6 per share, and you have 100 shares, you will earn Rs. 600 as a cash dividend. 

Benefits of cash dividends

Cash dividends have many benefits for you and the company. A description of the benefits are as follows:

  • Consistent source of income

Cash dividends offer you a steady source of income. These regular payouts can offer peace of mind and stability if you depend on investments to meet expenses or achieve financial goals.

  • Reward for investment

Cash dividends are a means to reward you for your investment in the company. The concept of profit sharing works in the company's favour and helps attract and retain investors. 

  • Tangible returns

Cash dividends differ from other investment strategies because they give tangible and immediate returns. They give cash that you can use for day-to-day expenses or reinvesting. 

  • Shareholder loyalty

When you receive regular cash dividend payments, you feel a sense of loyalty towards the company. You start trusting the company and feel motivated to stay invested long-term. Thus, cash dividends contribute to building a solid investor-company relationship. 

  • Positive signs of financial health

If a company pays dividends often, it signals financial stability and confidence in its prospects. The regular dividend payouts prove the company generates steady cash flow and profits. 

  • Grabbing the attention of investors

Companies paying attractive cash dividends are more attractive to new investors seeking to generate a reliable income stream. Moreover, as the interest in a company’s stock increases, the stock’s demand can rise, potentially leading to higher stock prices. 

Importance of a cash dividend

Cash dividends are crucial in establishing trust between companies and their shareholders. They express gratitude from the companies to the shareholders and nurture a sense of allegiance and recognition. These regular payments act as a steady source of income for investors, which is valuable for individuals who aim to maintain their financial security or plan for retirement through these investments. 

Moreover, companies paying out consistent returns are more attractive for new investors. Cash dividends enable companies to build a rapport with you. They instil confidence in your investment choices and promote a long-term partnership. 

Final words

Not all companies pay cash dividends. It is the decision of the company’s management and board of directors whether or not to pay dividends to the investors. Some companies prefer to reinvest all their profits for business growth, while others distribute cash to their shareholders. Besides, the amount of dividend payments and their frequency varies from one company to another. Thus, you should consider your risk tolerance and financial goals before investing in dividend-paying stocks. 

Start trading with Motilal Oswal to invest in dividend-paying stocks. 


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