Residual Dividend

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Definition of 'Residual Dividend'

A residual dividend is the portion of a company's earnings that is paid out to shareholders after all other obligations have been met. This includes taxes, debt payments, and preferred dividends. The residual dividend is often used as a measure of a company's financial health, as it indicates how much money is available to be distributed to shareholders.

There are a few different ways to calculate the residual dividend. One common method is to subtract all non-dividend payments from a company's net income. Another method is to use the Gordon Growth Model, which estimates the future value of a company's dividends based on its current dividend yield and growth rate.

The residual dividend is important for investors because it provides an indication of how much money a company is willing to return to shareholders. A high residual dividend can be a sign that a company is profitable and has a strong financial position. However, a low residual dividend does not necessarily indicate that a company is in trouble. Some companies may choose to retain earnings in order to invest in growth or research and development.

The residual dividend is also important for companies because it can help them to attract and retain investors. Investors are typically attracted to companies that pay high dividends, as this provides them with a regular source of income. However, companies need to be careful not to pay out too much in dividends, as this can reduce their ability to invest in growth.

The residual dividend is a complex concept, and there is no one right way to calculate it. However, it is an important metric for investors and companies alike. By understanding the residual dividend, investors can make better decisions about where to invest their money, and companies can make better decisions about how to use their earnings.

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