Updated July 17, 2023
Definition of Dividend Examples
A dividend can define as a portion of profits decided by the company’s board of directors with shareholder’s approval which not retain in the business and is paid to the shareholders of the company in the form of either cash, stock, or any other mode as a reward, consideration, return on the amount invested by them as share capital.
Explanation
A dividend is the portion of the company’s net earnings managed by the board of directors and paid to the class of eligible shareholders. These are paid by the public companies listed in the stock market to reward their shareholders for investing in the company. Paying dividends is accompanied by a proportional increase or decrease in the stock price. Shareholders having voting rights approve the dividends. The most common form of dividend is a cash dividend. Still, even the company’s share can give as dividends, or other forms like property, mutual funds, and other exchange-traded funds can give as dividends. Though dividends are paid from the company’s net profit, a major portion of the net profit is still retained for the company’s present and future business activities. A dividend may be paid even if the company doesn’t have a sustainable profit just to keep a track record of making regular dividend payments.
The board of directors may pay dividends at various time periods and different rates. These can be paid at a frequency such as monthly, quarterly, or annually. Companies can also issue special dividends that are non-recurring in addition to scheduled dividends. The dividend payment is not mandatory by law.
Examples of Dividend
Below are examples of the dividend :
1. Cash Dividend
The cash dividend is simply distributing profits in the form of money to shareholders, either from retained earnings or current earnings. This is the most common type of dividend in which cash payments are made to the shareholders. The payment can be made electronically, via cash or cheque. This dividend is resolved by the company’s board of directors to be paid in cash to its shareholders on the ex-dividend date. The date at which the dividends are assigned to its shareholders is known as the record date, and the date on which actual payment takes place is known as the dividend date of payment.
Cash dividends are the periodic cash distribution regularly, like monthly or quarterly but can be one-time payments such as settlements. These dividends come with a choice given by brokers to accept or reinvest the dividends as smart investors like to reinvest in terms of long term planning. The cash dividend is generally paid by companies that are well established with constant cash flows.
2. Stock Dividend
Stock dividend is the payment of dividends to its shareholders made in shares of common stock instead of cash. Stock dividends reward the shareholders without lowering the company’s cash balance but by diluting the market price and earning per share. These stocks are generally distributed in fractions paid per existing share. If the issue is less than 25 percent of the total outstanding shares, then this is treated as a stock dividend. But if the issue is for more than 25 percent of the total outstanding shares, it will be treated as a stock split.
Stock dividend is accounted by transferring the funds equivalent to fair market value from retained earnings to the capital stocks account at par value and balance to the additional paid-in capital account with the additional amount used to make the amount equal to the fair value of the issued additional share capital. The fair value of the additional shares issued is based on the fair market value at the time of dividend declaration. Stock dividends are not taxed until the owners sell them.
3. Property Dividend
Sometimes companies prefer non-monetary dividends instead of cash or stock dividends. These non-monetary dividends are property dividends and are alternatives to cash or stock dividends. Property dividends may include shares of a subsidiary company or any physical asset owned by the company. These dividends are recorded at the market value of the asset distributed, though a shareholder may hold the asset for future long term gains. As it is certain that the fair market value will vary from the book value of the asset, this variation will be recorded by the company as a gain or loss. Due to this rule, sometimes companies deliberately issue property dividends to change the taxable and operating income. Some examples of property dividends are real estate, physical assets, inventories, investment stocks, etc.
4. Scrip Dividend
A scrip dividend is a type of promissory note which may or may not be interest-bearing. Sometimes a company may not possess sufficient funds soon to issue dividends to the investors; instead, it issues scrip dividends. It is also known as a liability dividend. It is issued to the shareholders by the company as a certificate instead of cash, stock, or property dividend. This certificate allows the shareholders to redeem dividends at a later point in time or take shares in place of dividends.
5. Liquidating Dividend
Liquidating dividends are payments made by the corporation at the time of complete or partial liquidation. It is a form of a return of capital, i.e., refunding the amount of investment made by the shareholders. Accordingly, liquidating dividends is not taxable for shareholders. It differs from regular dividends distributed from regular profits and is also known as liquidating distribution. Liquidating dividend is distributed to shareholders with the intent of shutting down the business and is paid off after settling down all the creditors and legal obligations of the business. This dividend is paid when the business owner believes there is no future growth potential and incurs losses.
6. Preferred Dividend
Preferred dividends are accrued and paid only to preference shareholders of the company from the profits and retained earnings. Preferred stockholders enjoy preferential rights of receiving dividends compared to common stockholders, which implies that the company has to pay the preferred dividends first before paying off any dividend to equity/ residual stockholders. The dividend amount is usually fixed, i.e., a preferred shareholder will get a fixed percentage of the dividend every year.
7. Bond Dividend
Bond dividends are the same as scrip dividends. Only the difference is that bond dividend have a long maturity period and carry interest, and scrip dividends have a shorter maturity period and may or may not carry interest.
Conclusion
Dividends are considerations the company pays its shareholders in cash, stock, property, or any other form out of retained or current earnings as a return on the amount invested. There are multiple forms by which dividends can be distributed, out of which cash and stock dividends are the most common. The company should adequately plan dividend payments as it reduces retained earnings balance which could otherwise be used for future growth prospects.
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