Question

What is the importance of the dividend when discussing stock features, stock valuation, and investment options?

Answer 1

Dividend- It is a part of company's profit that is distributed to the shareholders.

Types: Two type are as following-

Common share dividend- This is given to common shareholders, whatever is the leftover dividend (after distributing to the preferred shareholders), is given to them. It is not fixed

Preferred share dividend- It is given to preferred shareholders, they are given preference in payment of dividend and repayment of capital. It is fixed.

Importance of the dividend in stock features- If an investor purchases shares of a company, he has dividend and capital appreciation in mind, so for motivating shareholders, dividend is very important part. It is a measure of shareholder's wealth maximization.

Importance of the dividend in stock valuation- Dividend is important in calculating the value of stock, we calculate value of stock on the basis of zero growth dividend, dividend discount model, multistage growth model etc. In all these models, dividend per share is used in calculation.

Importance of the dividend in Investment options- While choosing investment options, people who want to have regular and fixed income with less risk, go for preferred stocks, people who invest into mutual funds, they have two options, i.e. Growth and dividend, there is dividend payout option is available for investors who want to receive dividend directly into their account. Some people choose stocks that provide very good dividend. On the basis of dividend, investment needs are catered.