Definition of Dividend Examples
Dividend can be defined as a portion of profits as decided by company’s board of directors with shareholder’s approval which are not retained in business and is paid to the shareholders of the companyin the form of either cash, stock or in any other mode as a reward, consideration, return on amount invested by them as share capital.
Explanation
A dividend can be described as the portion of the company’s net earnings, managed by the board of directors and is paid to the class of eligible shareholders. These are paid by the public companies which are listed in the stock market as the reward to its shareholders for making investments in the company. Payment of 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 cash dividend, but even the company’s share can also be given as dividends or other form like property, mutual funds, and other exchange-traded funds can be given as dividends. Though dividends are paid out of the company’s net profit, a major portion of net profit is still retained for the company’s present and future business activities. A dividend may be paid even if the company doesnt have a sustainable profit just to keep a track record of making regular dividend payments.
Board of directors may choose to pay dividends at various time periods and with 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 Dividends
Examples of dividends are given below:
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 actual payment of cash is made to the shareholders. The payment can be done electronically, via cash or cheque. This dividend is resolved by the board of directors of the company 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 distribution of cash on a regular basis like monthly, quarterly but can be one-time payment 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 that is 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 per share and earning per share. These stocks are generally distributed in fractions paid per existing share. If the issue is less than 25 per cent of the total number of outstanding shares then this is treated as a stock dividend. But if the issue is for more than 25 per cent of the total number of outstanding shares then it will be treated as a stock split.
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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 declaration of dividend. Stock dividends are not taxed until they are sold by the owners.
3. Property Dividend
Sometimes company’s may prefer to give non-monetary dividends instead of cash or stock dividends. These non-monetary dividends are known as property dividends and are alternatives to cash or stock dividends. Property dividends may include shares of a subsidiary company or it can be 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 gain or loss. Due to this rule sometimes companies deliberately issues property dividends in order 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 in the near future to issue dividends to the investors therefore instead, it issues scrip dividend. It is also known as a liability dividend and is issued to the shareholders by the company in the form of a certificate instead of cash or stock or property dividend. This certificate provides the shareholders with an option to redeem dividends at a later point of time or can take shares in place of dividends.
5. Liquidating Dividend
Liquidating dividends is a payment 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 are not taxable for shareholders. It is different from regular dividends that are distributed from regular profits and are 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 that there is no future growth potential and is incurring losses.
6. Preferred Dividend
Preferred dividends are accrued and paid only to preference shareholders of the company from the profits and retained earnings. Prefered stockholders enjoy preferential rights of receiving dividends as compared to common stockholders which imply that the company has to pay the preferred dividends first before paying off any amount of dividend to equity/ residual stockholders. The amount of dividend is usually fixed i.e.a preferred shareholder will get a fixed percentage of dividend every year.
7. Bond Dividend
Bond dividends are the same as scrip dividends only the difference is that bond dividends 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 consideration paid by the company to its shareholders in the form of cash, stock, property or in any other form out of retained earnings or current earnings as a return on the amount invested. There are multiple forms by which dividends can be distributed out of which cash dividend and stock dividends are most common. Company’s should adequately plan dividend payments as it reduces retained earnings balance which could otherwise be used for the company’s future growth prospects.
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