Dividend

Dividend is the payment made by a corporation to its shareholder members. Dividend refers to the distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Dividends are the mandatory distributions of income and realized capital gains made to mutual fund investors. The individual investor has the choice of buying and owning a stock that pays a dividend is up to the individual investor, as there are both positive and negative aspects to consider. Dividends can be given in the form of cash (cash dividend), in the form of stock (stock dividend) or other property.

The advantage of dividends is that it provides an incentive to own stock in stable companies even if they are not experiencing much growth. It is not mandatory for companies are not required to pay dividends. Usually the companies that offer dividends are those companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders. Dividends are also called as payout. The companies of mutual funds pay out interest and dividend income received from their portfolio holdings as dividends to fund shareholders. The realized capital gains from the portfolio's trading activities are generally paid out (capital gains distribution) as a year-end dividend.

The dividends use two metrics which are commonly used to gauge the sustainability of a firm's dividend policy. First is the Payout ratio, which is calculated by dividing the company's dividend by the earnings per share. The calculation indicated that if a payout ratio is more than 1 then it means the company is paying out more in dividends for the year than it earned. The second metric is the dividend cover which is calculated by dividing the company's cash flow from operations by the dividend.

Questions:

• What is a dividend?
• What ate the two metrics used for dividends?