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Guaranteed Dividends: How does it work?
Usually, the amount of dividends depends on the company’s performance.
Some companies pay fixed amounts to their shareholders, sometimes laid down for many years in advance. Strictly speaking, however, these are not dividends, but compensatory payments. But what is the compensation for? Only companies that have been taken over by another company with a majority stake of at least 75 percent and have concluded control and profit transfer agreements are eligible. Instead of a dividend, minority shareholders receive a compensation payment, regardless of the business performance.
Speculation on severance offers or “squeeze out”:
In this way, attractive returns can be generated for minority shareholders, even though potential stock losses could theoretically diminish the return. In addition, not all stocks that meet the criteria are characterized by a liquid market. Buying or selling on the market could therefore be difficult under certain circumstances. However, some investors speculate on a different exit: the controlling company could make a new, higher severance offer or buy out the remaining shareholders through a “squeeze out”. In both cases, investors can usually expect higher profits. However, this is not a certainty.
The Facts:
- When one company owns at least 75 percent of another company, a control and profit transfer agreement can be concluded.
- In this case, minority shareholders often receive a predetermined compensation payment for many years in advance instead of the usual dividend, which is often touted as a guaranteed dividend.
- Not all stocks that qualify due to an existing control and profit transfer agreement can still be traded with liquidity.
- Therefore, buying and selling can be difficult.
- Depending on the individual situation of the company, speculation on an increased takeover offer for the minority shareholders may also be an option.
- If less than 5 percent of minority shareholders are involved, a “squeeze out” is also possible, which is usually well paid.
Our Conclusion:
Guaranteed dividends or guaranteed compensation payments often provide fixed payouts for minority shareholders over many years. If everything goes well, it could also lead to a high severance offer. Of course, there are also risks, such as low liquidity if you ever want to sell the stock. Especially if the company should falter, this could become a stumbling block.
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