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Dividend is a recurring payment from a company in the form of cash paid directly to the shareholder's brokerage account. In most cases, dividends occur quarterly but in some cases companies pay annually. There are two types of dividends: regular and special. Regular dividends are consistent and are rarely modified except for small annual increases as set by the Board of Directors. Special dividends are infrequent (ie, less than 1% of companies annually) and occur when a company has extra cash. Some pricing services may record a spin-off as a special dividend.
For context, it's difficult to know whether a company can afford to pay a dividend, particularly if its profitability declines. As a result, it is important for the analyst to review a company's payout ratio, or retention ratio, to see if a dividend could be cut. A company's Board of Directors is reluctant to reduce dividends because stock prices often drop substantially following this news.
During the Great Financial Crisis many banks reduced their dividends and in 2020, airlines and retailers cut payout ratios in response to declines in profitability related to the Covid-19 pandemic and competitive forces.
Guy: Should we assume dividends of 8% are not
Rex: For REITs I'm not sure that's a good assumption.
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$30. Price = Dividend / Yield
False. Over short periods of time, like 1 to 2 years, earnings can exceed dividends.
Still unclear on the concept of a dividend? Check out the Quant 101 series where we take a deep dive into financial modeling in Excel.
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