A dividend distribution occurs when a company offers some sort of reward to its shareholders in excess of the value of the company's shares. Companies do this both to reward the loyalty of current shareholders and to attract new investors. Dividend distribution may come in the form of cash payments, which can be reinvested in the company, or extra shares of stock. It is important to note that companies are in no way obligated to give out dividends, and they may cut them out in times of financial turmoil.
Investors are generally looking for those stocks that can offer them the most earning potential on the capital they invest. In terms of stocks, this potential is usually realized when the value of the stock goes up, thereby increasing the value of shares already held by investors. There are many companies that can sweeten the deal for investors by giving them regular dividends, which create some form of income for investors without them having to sell the stock. Dividend distribution is a way for companies to be more attractive to both the shareholders they already have and to the investors they wish to lure.
As an example of how dividends work, imagine that a company announces that it plans to give out a dividend of $10 US Dollars (USD) per share to its investors. A particular investor has a total of 1,000 shares of that company. At the time of the dividend distribution, that investor would receive $10 USD for each of his 1,000 shares, for a total dividend of $10,000 USD.
When dividend distribution occurs, some investors simply choose to receive the cash payout, which usually arrives in the form of a check from the company paying the dividend. Others may choose to reinvest the dividend in the company, thereby earning more shares. This would make the next dividend payout exponentially more valuable to those investors. Some companies simply give out more stock to investors as a type of dividend payment.
There is no guarantee when an investor buys a particular stock that a dividend distribution will occur. Many companies can afford dividends when their business is booming but can't afford them when times are tough, and they have no obligation to pay them out to investors. Since dividends are given out completely at the discretion of the company in question, an investor can do research on the company to find out if it reliably gives out dividends. Dividend histories show how many dividends were given out by a specific company, the timing of those distributions, and the amount given each time.