Dividend Declared

Definition of Dividend Declared

Dividend is the portion of profit of the company which is paid as return on the investment to the shareholders whereas dividend declared refers to that portion of profitwhich has been approved by the board of directors in board meeting and confirmed by the shareholders in general meeting as dividend to be paid and until paid dividend declared is treated as current liabilities.

Explanation

Dividend is the return on the investment in shares which is paid only in case sufficient profits are available. The dividend on equity shares is fluctuating in nature it changes with the change in the profit, higher the profit chances of high dividend declaration. In case of preference shares dividend is fixed and paid before payment to the equity shareholders whereas in case of mutual funds the dividends as not to be declared on annual basis it is declared sometimes on quarterly basis also, mutual fund company invest in different stocks and manage the portfolio so as to earn the maximum returns to the shareholders. In case of mutual funds also dividend defers depend upon the plan of mutual fund. Dividend declaration in all cases has certain process i.e. first board of directors of the organization has authority to decide whether dividend is to be recommend or not if they decide to recommend the dividend then only the dividend declaration is to be approved by the shareholders in general meeting and upon approvement by the shareholders the dividend is said to be declared i.e. liability for payment of dividend is to be created in balance sheet.

Example of Dividend Declared

A Inc. is dealing in consumer durables and in the year 2019-2020, it earns a profit of $ 250,000 after deduction of all expenses and payment of all taxes. The organization has 1,000, 5% preference shares having a face value of $ 100 each. Also, the organization has 5,000 equity shares having a face value of $ 100 each share. The Board of directors of A Inc decided to declare the dividend @ 10% on equity shares. Determine the procedure involved in case of declaration of the dividend and amount of dividend to be paid from profit to both equity shares and preference shares.

Solution:

For Declaration of Dividend on equity shares, the following is the procedure;

The Board of directors to recommend the rate of dividend to be paid and that recommendation of dividend declaration is to be put before the shareholders in general meeting and that is to be approved by shareholders by the ordinary resolution in a general meeting i.e. minimum 50% of the value of shares, the shareholders present in the meeting must have agree to it. The rate of dividend cannot be increased by the shareholders. Once the dividend is approved by ordinary resolution, the dividend is said to be declared and becomes the liability of the organization and it has to pay within few days of the declaration as per the norms of the country. Before payment to dividend on equity shareholders, the first payment of dividend to preference shareholders is to be made.

In the given case of A Inc.

Dividend on Preference shares is to be paid before the payment to equity shares

Dividend on Preference Shares is calculated as

• Dividend on Preference Shares = $ 100,000 * 5%
• Dividend on Preference Shares = $ 5,000

Dividend on Equity Shares is calculated as

• Dividend on Equity Shares = $500,000 * 10%
• Dividend on Equity Shares = $50,000

Amount to be recognized as liability as declared dividend = $ 55,000 ($5.000 + $55,000)

The Balance Profit i.e. $ 195,000 ($ 250,000 – $ 55,000) is to be transferred to the balance sheet as retained earnings.

List of Dividend Declared by Mutual Funds

List of daily Dividend declared by Mutual fund recently and their rate of dividend is as follows:

Advantages of Dividend Declared

Advantages are provided and discussed below:

• Dividend declaration gives the satisfaction to the investors, that they have invested in the right organization where they get the proper return on the investments made. This attracts more investors.
• Declaration of dividend increases the market value of the shares and increases the reputation in the market because of satisfied investors.
• The company will stand in a benefited position in case of a further public issue for expansion or diversification.
• Once declared, it becomes the liability of the organization and to be paid within a few days of declaration.
• The dividend declaration enhances the wealth of shareholders.

Disadvantages of Dividend Declared

Disadvantages are provided and discussed as below-

• As in some countries, the dividend is tax free and the organization declaring the dividend has to pay taxes on it from the own pocket, this demotivates the organization to declare dividends.
• The procedure and legal formalities involve in the declaration and payment of the dividend are lengthy and time consuming.
• Declaration of dividend sometimes results in loss of opportunity for investment where the organization can get the maximum returns.
• Not all investors get satisfied from the rate of declaration.
• On declaration, as it affects the market price the volatility in the stock market increases.

Important Points About Dividend Declared

• It is upon the board of directors to decide whether to recommend the dividend or not to recommend the dividend. They have the authority to decide not to declare dividend even if sufficient and huge profits are available.
• Before the declaration of dividend unabsorbed depreciation and brought forward losses are to be adjusted.
• After the declaration of dividend, the organization needs to transfer the amount of dividend in a separate bank account for payment to the shareholders.
• The dividend payment is to be reduced from the retained earning account.

Conclusion

The dividend is the return on the investment made by the shareholders in the organization and the declaration of dividend depends upon the availability of sufficient profits with the company. before the declaration of dividend, all the brought forward losses and unabsorbed depreciation is to be adjusted. The board of directors have the authority to decide whether the dividend is to be recommended or not. The shareholders cannot question the board for the non-declaration of dividend. Dividend once declared becomes the liability of the organization and has to be paid.

Recommended Articles

This is a guide to Dividend Declared. Here we also discuss the definition and list of dividend declared by mutual funds along with advantages and disadvantages. You may also have a look at the following articles to learn more –

1. Preferred Dividends
2. Final Dividend
3. Dividend Policy
4. Dividend Growth Rate