Dividend vs Buyback: Exploring different ways companies return value to shareholders
While many investors initially focus on the idea of capital appreciation as the means to profit from their investment, companies think from a different perspective. To them, you are not just a shareholder but a partner in their success. And hence, they employ several methods to ensure your satisfaction as a shareholder — beyond mere price appreciation.
The methods we are talking about are primarily dividends and buybacks.
Let’s find out how and why companies offer dividends and buy back their shares and how it affects share prices.
1. Dividends
Dividends are the special rewards that a company gives to its shareholders from the profit it has made. When the company makes profits, it either reinvests it into the business for growth or distributes profits with its shareholders.
Some companies do a bit of both. This sharing of profits with shareholders is what we call dividends.
Dividends are often seen as a passive income source, so investors prefer investing in such stocks.
Process of Dividend
After the company's Board of Directors declare the interim dividend (announcement of dividend during quarterly results) or final dividend (announcement of dividend for a financial year), they notify the stock exchanges, detailing the dividend amount and the payout date.
If you are interested in owning a stock that pays dividends, there are several important dates to remember.
1. Record Date: On this day, the company checks its records to see who the official shareholders are.
If you own shares on this day, you will get the dividend.
2. Ex-Dividend Date: This is the day when the company's shares start trading without the value of the upcoming dividend. You won't get dividends if you buy shares on or after this date.
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