What are dividends in the context of corporate finance?

Dividends in the context of corporate finance refer to the distributions of a company’s earnings to its shareholders. When a company generates profits, it can choose to reinvest those earnings back into the business for growth or distribute a portion of them to shareholders in the form of dividends. This action is a method for companies to reward their investors for their ownership stake and to provide a return on investment.

Dividends are typically expressed as a cash payment per share or as additional shares of stock. This distribution is usually set by the company’s board of directors and can vary based on the company’s policy regarding profit retention and reinvestment strategies. By paying dividends, a company signals financial stability and investor confidence, often making its stock more attractive to investors seeking income.

Understanding dividends is crucial for investors as they reflect a company's profitability, cash flow, and overall financial health, key indicators in evaluating investment opportunities.