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Dividend policy of a Company | Dividends and dividend yield

The decision of dividends that will be given to shareholders is one of three major corporate finance decisions: investment selection - choice of funding - dividend decision. Dividends resulting from a decision of the Annual General Meeting of Shareholders (AGM). Therefore, they are not responsible but declining reserves in the balance sheet.

Dividends and dividend yield

The following formula indicates that shareholder return is based on two sources of enrichment: the payment of a dividend and the increase in share value:
Annual rate of return = [( Price 1  - Price 0) Dividends +] /  Price 1

The payment of a dividend logically results in an immediate decline by the same amount and the value of the action. The value of a share is indeed the value of equity equal to the reduced enterprise value of net liabilities. However, debt was increased dividends paid. Accordingly, the dividend payment is not compensation, it does not increase the wealth of shareholders but only changes the distribution.

Values ​​of yield and growth in dividend:

The dividend yield is calculated differently depending on the types of actions:
Yield stocks paying high dividends because they are usually on a mature sector with a stable amount of investment. The preponderance performance thus comes from dividends. A high dividend reduces the variation in the performance of the action in the event of sharp fluctuations in stock prices.

Growth stocks are as their name implies a growth sector, they pay no or low dividends to devote most of their profits to finance high investment. The yield was mainly due to the increase in share price.

The listed company must display a dividend policy vis-à-vis its shareholders to enable them to select the profile action that matches their expectations. This policy is expressed essentially based on the following indicators:

 The distribution rate (payout ratio) Dividends paid in year N / earnings year N-1. 
In practice, business leaders often define the dividend amount from a percentage applied to future results. A dividend payout ratio below 20% is considered low, a rate higher than 60% is considered high, knowing that certain groups do not pay dividends as has been the case for the US group Apple until the death of its previous leader .

 The rate of dividend growth in absolute terms. Business leaders on a cyclical industry prefer some stability in the dividend amount by integrating a wide margin of maneuver in the distribution rate is therefore volatile.

Of course, the payout rate is not fixed, it does not fluctuate based solely on past performance, it is also a "signal" for the future:

The dividend cut may be due to the anticipation of a decline in results or the need to finance future investment. In this second case, the group must communicate clearly to shareholders because of the dividend reduction or risk seeing its stock price decline.

Thus, before being acquired by SAP, the Business Intelligence software company convinced its shareholders not to pay dividends despite high profits and a substantial surplus cash position. It was to accumulate resources to finance the buyout firms on a concentration stage business.

Conversely, an increase in the dividend reveals an anticipation of higher earnings and lower future investment.

There several years, the financial director of a large listed group was speaking pure justify a special dividend and redemption of action: "There are some years, our group had asked shareholders to finance development projects important. Today, these projects generate significant cash flows, our debt has decreased and we have no major investments planned. We are therefore able to return cash to shareholders. When we needed money, we ask them. They entrust us to create value and not for a performance bond. This does not exclude that if we have new investment projects, we return to them. "
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