EDUCBA

EDUCBA

MENUMENU
  • Free Tutorials
  • Free Courses
  • Certification Courses
  • 250+ Courses All in One Bundle
  • Login

Dividend

By Sourav SinhaSourav Sinha

Home » Finance » Blog » Corporate Finance Basics » Dividend

Dividend

Introduction to Dividend

A dividend is a portion of the profit that is paid out by public companies to the shareholders. It is not mandatory for a company to pay it. It is not an expense but a percentage share of profit that is decided by the Board of Directors of the company.

It is the distribution that is made by the company from the after-tax portion of the profit. Many Mutual Funds buy stocks that pay regular stable dividends. Many Mutual Funds are under regulations that don’t allow them to buy Non-Dividend paying stocks. Mature companies mainly engage in such payments as they don’t have scope for fresh investments. So instead of retaining profits as a reserve, they pay them as dividends.

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

How does It Work?

Public limited companies raise money from the public by selling shares. When an investor buys shares of a company, then that investor becomes the shareholder of the company. Shareholders are also owners of the company. So when a company makes a profit, then the Board of Directors of the company decide whether the profit should be retained in the business or paid as a dividend to the shareholders. Generally, a percentage of profit is retained in the business for future growth prospects, and the rest is distributed to shareholders.

Formula

Dividend Per Share = (Net Profit * Pay-Out Ratio) / Number of Shares Outstanding

Example of Dividend

Company ABC is a public limited manufacturing company that operates from the United States. The company is matured and doesn’t have the scope for fresh investments in the market. The company made a profit of $500,000 this quarter and plans to pay a dividend to the shareholders. Total shares outstanding for ABC is 100,000. The pay-out percentage is 50%. Calculate the dividend per share.

Solution:

  • Net Profit = 500,000
  • Pay-Out Ratio = 50%
  • Number of Shares Outstanding = 100,000

It is calculated using the formula given below

Dividend Per Share = (Net Profit * Pay-Out Ratio) / Number of Shares Outstanding

  • Dividend Per Share = (500,000 * 50%) / 100,000
  • Dividend Per Share = 2.5

This means that each shareholder will receive $2.5 as a dividend.

Types of Dividend

There are several types that a company can announce.

  • Cash Dividend: When the Board of Directors plans to start paying dividends to shareholders, then the policy is formed. The cash is also referred to as an ordinary dividend and is paid from the regular profit of the business.
  • Additional Dividend: At times companies plan to pay more dividends to shareholders as a bonus. When the extra dividend is paid from the same regular yearly profit, then that is called an additional dividend.
  • Special Dividend: If in a particular year, the company makes a sudden profit that is not part of regular operation. Then that earning can be distributed to shareholders as a form of a special dividend. There is no guarantee that a company will pay a special dividend, it happens in rare occasions.
  • Stock Dividend: When a company issues additional stocks to shareholders, then that is called a stock dividend. The amount that is equal to the fair value of stocks is transferred from the reserve account to the capital account.
  • Liquidating Dividend: Poorly running public limited companies are often liquidated and the proceeds are paid to debt holders first and the remaining amount is paid to equity shareholders as liquidating dividends

Dividend Taxation

These are taxable, but the tax rate depends on whether the dividend is qualified or nonqualified.

Popular Course in this category
Sale
Business Valuation Training (16 Courses)16 Online Courses | 80+ Hours | Verifiable Certificate of Completion | Lifetime Access
4.5 (8,917 ratings)
Course Price

View Course

Related Courses
Equity Research Training (17 Courses)Project Finance Training (8 Courses with Case Studies)

For a dividend to be qualified, there are certain criteria, the dividend must be paid by a U.S. company, or a company in U.S. possession, or a foreign company stock that has the right to freely trade in US market, or a foreign company operating from a country that benefits from U.S tax treaty.

When it is qualified, the tax slab is different. Lower tax slabs are exempted for qualified dividends. If it is nonqualified, then that dividend will be taxed as normal regular income.

Dividend Dates

There are 4 important dates associated:

  • Announcement Date: This is the date when the company first announces that they plan to pay a dividend. Usually, the announcement is made as a press release.
  • Ex-Date: If a person buys the share of the company on this date, then the person will not receive the dividend from the company. To get that is announced, an investor must buy the share at least one day prior to Ex-Date
  • Record Date: On this date, the company checks its Record Book and sees the name of the shareholders. These shareholders will be eligible to receive the payment on the pay-date of the dividend.
  • Pay-Date: The amounts are transferred to the shareholder’s accounts on this date. Actual payment is made.

Effect of Dividend on Share Price

This is either paid from the reserve or from the regular yearly profit of the company. Once the cash goes out of the company, it is obvious that the valuation of the company will not remain the same. The effect happens on the Ex-Date. On the Ex-Date of the Dividend, the share price gets reduced by the amount.

Difference Between Dividend and Buyback

The dividend is being treated as a fixed commitment from the company by the shareholders. Once a company starts to pay, then that company is expected to pay dividends forever. So this is sticky. On the other hand, buyback is not sticky. Whenever a company has extra cash, then that company can go for buyback of shares. Buyback is actually buying back of shares from the shareholders at a premium price. These leave the shareholders happy and the company will not have to repeat the procedure at a fixed interval of time.

Conclusion

These are a way by which a company shares profit to its shareholders. Many big companies maintain a steady rate of dividend in order to enjoy the goodwill in the market. Matured companies usually engage in paying dividends. There is no mandatory rule that a company will have to pay a dividend.

Recommended Articles

This is a guide to Dividend. Here we also discuss the introduction to Dividend, how does it work, along with several types. You may also have a look at the following articles to learn more –

  1. Dividend Growth Rate
  2. Dividend Discount Model
  3. Dividend Payout Ratio
  4. Interest vs Dividend

All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)

250+ Online Courses

40+ Projects

1000+ Hours

Verifiable Certificates

Lifetime Access

Learn More

3 Shares
Share
Tweet
Share
Primary Sidebar
Finance Blog
  • Corporate Finance Basics
    • BPO vs KPO
    • C Corporation
    • Brick and Mortar
    • Business Entity Concept
    • Bounced Check
    • Capital Maintenance
    • Bridge Financing
    • Business Exit Strategy
    • Callable Bonds
    • Affiliated Companies
    • Certified Check
    • Chattel Mortgage
    • Contingent Beneficiary
    • Debt Collector
    • Closed Corporation
    • Cumulative Voting
    • Consumer Loan
    • Commercial Loans
    • Collateralization
    • Commercial Credit
    • Collection Agency
    • Classification of Financial Markets
    • Class Action Lawsuits
    • Prudence Concept in Accounting
    • Calmar Ratio
    • Asset Classes
    • Audit Evidence
    • Contingent Liability
    • Employee Stock
    • Financial Liabilities
    • Incurred Cost
    • Partial Income Statement
    • Deferred Tax Asset
    • Tax Fraud
    • Non-Operating Income
    • Variable Costing
    • Mixed Cost
    • Prime Cost
    • Regressive Tax Examples
    • Unqualified Opinion of Auditor
    • Bonds Payable
    • Class A Shares
    • Contingent Liability Example
    • Contingent Shares
    • Contributed Capital
    • Brownfield Investment
    • Internal Audit
    • Indirect Taxes
    • Fund Management
    • Fixed Cost
    • Debt Equity Swap
    • Cash Flow Hedge
    • Risk Shifting
    • High Yield Investments
    • General Obligation Bond
    • Forward Market
    • Box Spread
    • Fixed Income Trader
    • Trade Discount
    • Quick Assets
    • Notes Payable
    • Revenue Bonds
    • Euribor
    • Settlement Date
    • Short Covering
    • Short Selling
    • Dividend Examples
    • Time to Market
    • Junior Accountant
    • Commodity Derivatives
    • Flash Report
    • Idle Time
    • Leasehold Improvement
    • Product Portfolio
    • Risk Parity
    • Branch Accounting
    • Credit Enhancement
    • Basis Trading
    • At the Money
    • Collateralized Mortage Obligation
    • Accounts Receivable
    • Long Term Investments
    • Negative Goodwill
    • Recourse Factoring
    • Residual Value
    • Short Term Loan
    • Tax Exempt
    • Audit Report Format
    • Cash Investment
    • 457 Plan
    • Audit Procedure
    • Audit Materiality
    • Audit Committee
    • Asset Allocation
    • Non-Cash Expenses
    • Dividend Policy Types
    • Credit Terms
    • Dividend Payable
    • Profit Center
    • Absorption Costing
    • Final Dividend
    • Hybrid Securities
    • Other Current Assets
    • Simple Random Sample
    • Dependency Ratio
    • Effective Duration
    • Loan to Value Ratio
    • Inventory Turnover Ratio
    • Advantages of Ratio Analysis
    • Loss Ratio
    • Delaware Corporation
    • Debt to GDP Ratio
    • Articles of Incorporation
    • Negative Covenants
    • Statutory Liquidity Ratio
    • Leverage Ratio for Banks
    • Accrued Liabilities
    • Activity Ratio
    • Debt Service Coverage Ratio
    • Return on Investment Ratio
    • Turnover Ratios
    • Cash Conversion Cycle
    • Lumion vs V-Ray
    • Capital Intensive
    • Voided Check
    • Negotiable Instruments
    • Portfolio Optimization
    • 401k Plan
    • Non-Marketable Securities
    • Stock Certificate
    • Treasury Stock
    • Appropriate Retained Earnings
    • Stockholder
    • Share Vesting
    • Shares Issued
    • Preferred Shares
    • Share Buyback
    • Shareholder Types
    • Tax Loss Harvesting
    • Statutory Audit
    • Audit Risk
    • Fund of Funds
    • Accredited Investor
    • Cost Centre
    • Lessee
    • Golden Handcuffs
    • Ordinary Shares
    • Restricted Stock Units
    • Goodwill Valuation
    • Share Classes
    • Lessor
    • Preferred Dividends
    • LIFO Liquidation
    • Dilutive Securities
    • Restructuring Cost
    • Non-Cumulative Preference Shares
    • Pass Through Entity
    • Management Discussion and Analysis
    • Premium on Stock
    • Leveraged Loans
    • Dividend
    • Dividend Policy
    • Financial Reporting Objectives
    • Financial Reporting
    • Internal Controls
    • Capital Investment
    • Debt to Equity Ratio
    • Dividend Growth Rate
    • Market Capitalization
    • Deal Origination
    • Importance of Working Capital
    • SWOT Analysis
    • White Knight
    • Root Cause Analysis
    • Realized Gain
    • Return on Operating Assets
    • Offshore Investments
    • Transfer Price
    • Times Interest Earned Ratio
    • Debt Coverage Ratio
    • Dividend Discount Model
    • Combined Ratio
    • Merger Arbitrage
    • Gordon Growth Model
    • Advantages of Joint Venture
    • Interest Coverage Ratio
    • Reserve Requirements
    • Asset Turnover Ratio
    • Price to Rent Ratio
    • Ratio Analysis Types
    • Debt Ratio
    • Business Risk
    • Financial Leverage
    • Dividend Payout Ratio
    • Mistakes in DCF
    • Risk/Reward Ratio
    • Full Form of FIPB
    • Financial Risk
    • CAPE Ratio
    • Overcapitalization
    • Systematic Risk
    • Hedge Ratio
    • Full Form of NHB
    • Sensitivity Analysis
    • Current Ratio
    • Corporation Examples
    • Asset to Sales Ratio
    • Balance Sheet Ratios
    • List of Financial Ratios
    • Coverage Ratio
    • Forward PE Ratio
    • Interpretation of Debt to Equity Ratio
    • Capitalization Ratio
    • Importance of Ratio Analysis
    • Quick Ratio Interpretation
    • Corporate Finance Basics
    • PEG Ratio
    • Corporate Finance Interview Questions
    • Price to Earnings Ratio
    • Structured Note
    • Limitations of Ratio Analysis
    • NPV vs IRR
    • IRR vs ROI
    • Imputed Interest
    • Full Form of HR
    • Shareholders Agreement
    • Earnings Per Share
    • Corporate Finance Jobs
    • About Corporate Finance
    • Corporate Finance Theory & Practices
    • Career in Corporate Finance
    • Simple Interest Rate vs Compound Interest Rate
    • Stocks vs Shares
    • Bonds vs Debenture
    • Bull Market vs Bear Market
    • Mortgagee vs Mortgagor
    • Horizontal Integration vs Vertical Integration
    • Money Market vs Capital Market
    • Leveraged vs Unleveraged
    • Dividends vs Capital Gains
    • Present Value vs Net Present Value
    • Qualified vs Ordinary Dividends
    • ROE vs ROA
    • Bond vs Loan
    • Stock Dividend vs Stock Split
    • Audit vs Assurance
    • Coupon Rate vs Interest Rate
    • Growth Stock vs Value Stock
  • Accounting fundamentals (614+)
  • Asset Management Tutorial (181+)
  • Banking (43+)
  • Credit Research Fundamentals (6+)
  • Economics (44+)
  • Finance Formula (382+)
  • Financial Modeling in Excel (13+)
  • Investment Banking Basics (114+)
  • Investment Banking Careers (26+)
  • Trading for dummies (67+)
  • valuation basics (27+)
Finance Blog Courses
  • Online Business Valuation Training
  • Equity Research Certification
  • Project Finance Course
Footer
About Us
  • Blog
  • Who is EDUCBA?
  • Sign Up
  • Live Classes
  • Corporate Training
  • Certificate from Top Institutions
  • Contact Us
  • Verifiable Certificate
  • Reviews
  • Terms and Conditions
  • Privacy Policy
  •  
Apps
  • iPhone & iPad
  • Android
Resources
  • Free Courses
  • Investment Banking Jobs Offer
  • Finance Formula
  • All Tutorials
Certification Courses
  • All Courses
  • Financial Analyst All in One Bundle
  • Investment Banking Training
  • Financial Modeling Course
  • Equity Research Course
  • Private Equity Training Course
  • Business Valuation Course
  • Mergers and Acquisitions Course

© 2022 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

Let’s Get Started

By signing up, you agree to our Terms of Use and Privacy Policy.

Loading . . .
Quiz
Question:

Answer:

Quiz Result
Total QuestionsCorrect AnswersWrong AnswersPercentage

Explore 1000+ varieties of Mock tests View more

EDUCBA Login

Forgot Password?

By signing up, you agree to our Terms of Use and Privacy Policy.

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

Special Offer - Online Business Valuation Training Learn More