Dividends are generally cash payments distributed to owners of a stock. Companies are not required to issue dividends to their stock holders, but many companies decide to do so in order to create value and encourage ownership of their stock. Another way to view dividends is as a distribution of the company’s earnings to the company’s owners (share holders).
When a company earns a profit, it must decide what to do with its surplus cash. It can reinvest the surplus back into the company or it can distribute it to its shareholders in the form of a cash payment. Companies that would reinvest the money are usually younger companies that want to increase the value of the business by funding growth. These stocks are generally called growth stocks.
Once a company decides to pay out a dividend, it is allocated as a certain amount per share - such as $0.32 or $0.11. This creates the situation where the more shares of a stock that you own the greater payout you will receive from the dividend payment.
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