Reading: Payout Basics

With a dividend payment, firms distribute a share of the after-tax profit to their shareholders. Important characteristics of dividends include:

• Decision maker: Depending on the firm's country of incorporation, the amount and timing of the dividend is decided by the board of directors (for example in the United States) or the shareholders' meeting (for example in Switzerland).
   
• Source of funds: Dividends are paid out of current earnings or past earnings that have been retained in the company as reserve. It is usually prohibited by law to pay dividends out of future expected (but still unrealized) earnings.
   
• Dividends to preferred stock: If the board (or the shareholders' meeting) declares a dividend, holders of preferred stock are paid first. For each share of preferred stock, they generally receive a fixed dividend that corresponds to a fixed percentage of the invested capital. Please refer to the module Deal Structuring for more information about the dividend terms of preferred stock.
   
• Dividends to common stock: In contrast, holders of common stock receive the amount of dividend that has been declared by the board (or the shareholders' meeting). If no dividend has been declared, common stockholders have no legal claim for a dividend. Therefore, common stock factually gives shareholders the right to hope for a dividend.
   
• Payout Frequency: In smaller firms, dividends are usually paid once per year. In contrast, large publicly traded firms often pay dividends on a quarterly or semi-annual basis (at least in the U.S.). Dividends are generally "sticky," in the sense that firms try to avoid cutting the amount of payout from one period to the next.