Declared and paid dividends are, in a sense, the way a corporation—whether it is incorporated under Quebec or federal law—distributes all or part of its earnings or profits to its shareholders. In fact, when a corporation makes profits, it has two possible choices: 1) to reinvest those profits in its operations to further its development; or 2) to share all or part of them with its shareholders, which the company does by declaring and paying dividends.
Thus, dividend declarations generally cause the price of the company’s shares to rise or fall, depending on the dividends announced. However, some companies decide to pay dividends even if they have not made a profit; they do so to maintain regular dividend payments to eligible shareholders and to stabilize their stock price at the time of the announcement of their financial results.
Sometimes, dividends are seen as a reward for shareholders; in fact, some companies choose to pay dividends to reward investors who entrust their capital to them, thereby maintaining their confidence and build a solid reputation with them. It should be noted that dividends are not guaranteed income, as the company’s board of directors may reduce or even eliminate dividend payments if it chooses to use the funds for other purposes or if the company’s performance is insufficient to pay them.
Subject to any unanimous agreement among shareholders, the board of directors decides, at its sole discretion, to declare dividends and also to determine the dividends to be paid to eligible shareholders, i.e., the total amount of the declared dividend; however, the board may declare dividends only if the company has legally authorized to do so, in accordance with the criteria established by provincial and federal corporate laws.
The company’s articles of incorporation determine the classes of stock eligible to receive dividends, that is, which shareholders are entitled to receive dividends, since not all classes of stock are eligible to receive a dividend; furthermore, there may be priority rankings granted to certain classes of stock under the articles of incorporation. Therefore, before declaring dividends, the board of directors must verify whether the company’s articles of incorporation permit the declaration and payment of dividends for the class of shares for which it intends to do so.