Dividends are part of the company’s profits that are distributed to shareholders. These distributions are not an obligation to investors.
Earlier this month, logistics giant FedEx Corp. (NYSE: FDX) declared a quarterly cash dividend of $1.15 per share. This represents an increase of 53%, or $0.40 per share, compared to its previous quarterly dividend of $0.75 per share.
What are dividends and why do companies pay them?
A company that generates consistent profits may choose to utilize its cash flows to reinvest in its business or lower its debt balance, reducing its interest payments over time. Alternatively, it can also opt to pay shareholders a dividend. So, dividends are the portion of a company’s profits distributed to its shareholders.
Around 75% of the companies within the S&P 500 index pay investors a dividend. Generally, companies that pay dividends generate stable cash flows across business cycles. It’s more likely for mature businesses to pay dividends compared to fast-growing companies, as the latter will often reinvest profits to fuel their expansion plans.
Dividend payments are not guaranteed or obligatory, and might be revoked or suspended by the company’s board of directors. For example, oil prices collapsed during the COVID-19 bear market and several energy companies suspended or reduced dividend payments due to widening losses.
When are dividends paid?
The majority of companies pay investors a quarterly dividend. However, a few companies also have monthly, bi-annual or annual payouts. The board of directors agree on the dividend amount and subsequent increases, after which the company declares the payout.
- Record date: This is the cut-off date announced by the company to determine shareholders eligible for the payout. The record date for FedEx is June 27.
- Ex-dividend date: It’s the date after which the dividend payout is not owed to the shareholder. The ex-dividend date for FedEx is June 24.
- Payment date: It’s the date when dividends are disbursed to shareholders. FedEx will distribute its quarterly dividends to shareholders on July 11.