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The value of a share of stock can be determined in various ways. First, most companies pay dividends but not all companies since some companies retain their earning within the business. The main reason why a share of stock depends on dividend is because most investors believe these companies have great potential and are likely to pay large sums of dividends in future. Virtually all mature, productive public companies pay a cash dividend to their shareholders which are later distributed to some part of the earnings of the company. According to state law, dividends must be paid out of current or retained earnings. Generally, dividends are widely considered by investors to provide a valuable gauge to the health of the company. The willingness of a company to pay dividends will likely indicate its stability since dividends provide the required income for a number of investors as well as a strong measure of certainty concerning the company's future prospects (Freedman, 2009).
Freedman, (2009) asserts that stock value is not dependent on the dividend and in fact it is the other way round. Based on the value of stock, most firms are likely to propose dividend. In the past few decade people depended on dividends in order to understand whether the company is productive. The company is viewed to be in good shape if it pays dividends. Moreover, the amount of dividends varies and is usually decided upon by the Board of Directors who determines quarterly what the dividend per share should be. As a rule they like to approve the same amount each quarter or rather increase it from time to time.
According to Peter, (2010) many companies in the stock exchange market do not pay dividends but rather reinvest the profit in the business. The amount of profit distributed as dividends as a percentage of the total profit is referred to as payout ratio. In case a company has a payout ratio of 75% and another one has 25%, then it is possible for the second company to pay dividend quarterly even if profit falls. Nonetheless, a consistent record of paying dividends can prevent the stock price from falling faster due to fact that stock price grows lower while the yield increases.
Finally, the dividend is based on the share of the stock i.e. so many cents per share. So it is usually important that you look at the amount of dividends in order to determine how many cents per share a company is paying. Companies are also capable of cutting the dividend amount but they are usually reluctant to do so because most people buy stocks to earn dividends and therefore if cut, this will result into a reduced share price (Peter, 2010).