Dividends, a factor of profitability

What does a company do with the profits it gets at the end of the fiscal year? There are several options: the company can reinvest them, or it can share them with stockholders as dividends.

Proposed by the Board of the company and approved by the Shareholders’ Meeting, the payment of dividends can be made in cash or in shares. In any case, the company must determine the amount of the dividend per share.

A common practice today is to resort to scrip issue, so shareholders are offered the option of choosing to receive dividends in cash or in stock.

Dividends can be classified into two large groups:

  • Ordinary dividends, which are normally distributed semiannually (in the months of winter and summer in many companies listed on IBEX 35) or quarterly. The payment can be split up, that is, an initial amount can be distributed in advance based on an estimate of the end-of-year results, and this is  later completed with the remaining amount.
  • Extraordinary dividends, resulting from unforeseen results of the company.

In order to collect them, the shareholder must ensure that his name is found in the company’s registration books. In Spain, stocks must be purchased at least three business days before the date on which the company consults those books to prepare the list of shareholders.

Relationship with the performance of stocks

The payment of dividends usually adds appeal for potential investors, although they should not be the only factor that must be taken into account when deciding on the actions of one company over those of another.

Generally speaking, growing companies do not usually pay dividends, because they reinvest all their profits in financing their expansion. On the other hand, companies that are in a more “stable” part of their cycle may share their profits.

But this circumstance also influences the price of the shares: stocks of growing companies typically tend to rise in price, while the shares of more senior companies may not experience major variations. Although, of course, this is not a universally applicable law.