What are dividends?
Shareholders make a return on their equity investment when their share price appreciates; this is known as capital gains. But, apart from this, they can also make a return from dividends, which are the distribution of the company’s earnings. The amount of dividends paid may vary from company to company; as some with large cash piles may be able to pay large cash dividends while others choose not to pay any at all, and retain it in the company to fund future capital investments.

Can a company decide not to pay dividends?
The decision whether to pay dividends or not, forms one of three pivotal decisions in financial management; the other two relate to investments and financing. When a company makes a profit, it can decide whether to pay it to shareholders as dividends or to retain, and reinvest it. If it chooses to retain the profit, then the funds should be put to good use by investing in productive assets, which can generate returns and increased shareholders’ value in the long run, or alternatively, it can be used to retire any outstanding debt in the company. The retention of earnings increases shareholders’ equity in the company, and should generate higher earnings and dividends in the future.

However, if the company chooses to pay dividends to its shareholders, there are various ways it can do so. Most companies pay a regular dividend, which is normally declared by the board of directors, and approved by shareholders consisting of an interim and a final dividend. The dividend to be paid is normally stated as a percentage of the par value of the shares.