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11 October 2024

What are dividends and how do they work?

When talking about stocks and investments, you often hear the word "dividends." But what are they and how do they work? Let's understand it in simple words.

What are dividends?

Dividends are part of a company's profits that it distributes to its shareholders. Simply put, if you own shares in a company, you can receive a portion of its income in the form of cash payments. This is a kind of "reward" for owning shares of this company.

How do dividends work?

When a company makes money, its shareholders decide what to do with the profits. Some of the money can be used to develop the business, such as opening new branches or developing new products. And they can use the other part to pay shareholders - that is, dividends.

Dividends are paid on each share. For example, if you have 10 shares of a company and it decides to pay 1,000 UZS in dividends per share, you will receive 10,000 UZS (1,000 UZS x 10 shares).

How often are dividends paid?

The frequency of dividend payments depends on the company. Some companies pay dividends quarterly (that is, every three months), some - once every six months or year. It also happens that a company may decide to temporarily not pay dividends if it needs more funds for development.

Who receives dividends?

Dividends are received by shareholders - those who own shares of the company at the time of payment. But it's important to remember that not all companies pay dividends. For example, companies that are actively growing and investing all their resources in development may not pay dividends at all. They prefer to use profits for growth, which can lead to higher stock prices in the future.

Why do companies pay dividends?

Companies pay dividends for several reasons:

1. Attracting investors. For many people, the ability to receive dividends is a compelling reason to buy company shares.
2. Shareholder incentives. It is a way of thanking shareholders for their contributions to the business.
3. Trust. Dividend payments show that a company is stable and has enough profits to share with shareholders.

What are the types of dividends?

Dividends can be of different types:

1. Cash dividends. This is the most common type of dividend, where a company simply pays out money to its shareholders.
2. Stock dividends. Sometimes a company may distribute additional shares instead of cash. This means shareholders receive more shares rather than cash.
3. Special dividends. These are one-time payments that the company makes in case of particularly large income.

How do you know if a company pays dividends?

Information about dividend payments is usually available on company websites or in the news. You can also contact your broker, who can tell you which companies pay dividends and what their payment history is.

Not all companies pay dividends. Young companies or those that are actively developing may not pay dividends at all, as they direct all profits to growth.

So, dividends are a great way to get income from a stock even if its price doesn't change. Companies share their profits with shareholders, and this can be an important part of your income if you decide to invest in stocks.

 

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