Dividends are part of the company's profits that are distributed to shareholders.
Dividends in the world of stock investing are the portion of a company's profits that are distributed to shareholders. So, if the company is profitable, its shareholders are entitled to receive a portion of that profit. This dividend distribution is not automatic. Companies must first decide whether or not they want to distribute their profits. This decision is usually made at the General Meeting of Shareholders (GMS).
There are a few things to note about dividends:
Type of dividend: Dividends can be distributed in cash (money) or shares.
Important dates: There are several important dates related to dividends, such as the cum-dividend date (the last date to be entitled to receive dividends), the ex-dividend date (the date on which share buyers are not entitled to receive dividends for that period), and the dividend payment date.
Dividend payout ratio: This is the ratio of how much of a company's profit is distributed as dividends.
Investors who expect regular income from stock investments are usually interested in companies that regularly pay dividends. However, long-term oriented investors may prefer companies that use their profits for expansion rather than distribution as dividends.
in this case, there must be some reaction from investors/market if the dividend announcement is announced.
Investor reactions to dividend announcements can vary, depending on several factors, including:
1. The size of the dividend increase:
Dividend Increase:
Positive: Investors are excited at the prospect of receiving higher earnings. The share price could potentially rise and trading volumes increase.
Neutral: Investors reassess the intrinsic value of the stock based on its value after factoring in the dividend payment.
Dividend Decrease:
Negative: Investors are disappointed at the prospect of receiving lower earnings. The stock price potentially falls and trading volume increases.
Neutral: Investors reassess the intrinsic value of the stock based on its value after factoring in the lower dividend payout.
Fixed:
Neutral: Investors reassess the intrinsic value of the stock to see if the value is still in line with their expectations.
Positive/Negative: Depends on the investor's prior expectations. If the initial expectation was an increase in dividends, then investors may react negatively. Conversely, if the initial expectation was a decrease in dividends, then investors may react positively.
2. Financial Condition of the Company:
-Strong:
Positive: Investors are more optimistic even if the dividend does not increase.
Neutral: Investors keep reassessing the intrinsic value of the stock.
-Weak:
Negative: Investors may sell their shares even if dividends go up.
Neutral: Investors continue to reassess the intrinsic value of the stock but with more caution.
3. Company Dividend Policy:
-Consistent:
Positive: Investors can more easily predict their future earnings and tend to be calm.
Neutral: Investors keep reassessing the intrinsic value of the stock.
-Inconsistent:
Negative: Investors have a harder time predicting their future earnings and tend to panic.
Neutral: Investors continue to reassess the intrinsic value of stocks but with more careful consideration.