Dividend and profit both terms are used in the context of financial markets, while many people who have invested money into stocks of listed companies get excited when a company announces profit as they think that they will get benefit from that profit but the fact of the matter is they do not get anything until the company announces dividend to the shareholders. Hence it is very important to know that profit and dividend are two different things and that is the reason why one should know the difference between dividend and profit –
Dividend Vs Profit
Meaning
Dividend refers to that amount which company pays to its shareholders, in simple words out of the total earning made by the company the shareholders get part of that earning in the form of dividend while profit refers to that amount which the company earns after paying all operating as well as non-operating expenses from the sales done by the company during the year.
Types
A dividend can be of many types like cash dividend in which a company pays a cash dividend to its shareholders or it can be a special dividend in which company pays a special dividend which is over and above the regular dividend paid out by the company or it can be a stock dividend in which company offers new stocks of the company on pro-rata basis. While profits are of three types one is which is sales minus cost of goods sold, the second one is operating profit which is calculated from gross profit minus operating expenses and the last one is net profit which is calculated as operating profit minus taxes, interest, and all non-operating expenses.
Receiver
In the case of dividend, it is the shareholders who receive the dividend in the proportion of shares held by them while in the case of profit it is the company which receives the profit and how the company uses that profit is decided by the directors and owner of the company who may decide to use this profit to pay a dividend to the shareholders or for expansion of business or for the acquisition of some other company and so on. In simple words, the dividend is the income of the shareholders while the profit is the income of the company.
Periodicity
In the case of dividends, it is not necessary that shareholders will receive a dividend every year as the dividend amount is dependent not only on the profits of the company but also on the willingness of the board of directors or owners of the company while as far as profits are concerned they are dependent only on the financial performance of the company that is if the company is doing well than profits will happen every year. In short dividend amount will always be less than the profit amount as dividends are paid out from the profits earned by the company during the year.
Amount and Distribution
In case of profit, the amount of profit will always be in round figure and the profit amount belongs to the company only while as far as the dividend is concerned dividend is given as a percentage of profit and that is the reason why it can be in fraction also besides dividend is distributed to a large number of small shareholders.
Taxation
In the case of dividends in the majority of countries dividend income is tax-free and hence shareholders do not have to pay any taxes on dividend income but as far as profits are concerned they are taxed. In simple words, while there is no tax on dividend but as far as profits are concerned companies will have to pay taxes on the profits earned during the year.
As one can see from the above that profits and dividends are different from each other and that is the reason why any person looking at investing money into the company should carefully analyze the profit and dividend-paying pattern of the company over the years and then only should invest into the company.