Dividends – Meaning and its Types

By | August 19, 2019
Dividend

The dividend is a reward that is distributed from the amount accumulated by virtue of the earnings of the company. This reward is distributed amongst the shareholders of the company. The power to decide and manage the distribution of the dividends is vested with the Board of Directors of the Company.

The said power is vested in them by the shareholders by exercising their voting rights. There are various ways of issuing dividends such as shares of stock, cash payments or any other property.

The most common way in which the dividends are issued is the cash payment. Not only companies are entitled to pay the dividends but even some exchange trade funds, as well as mutual funds, also fulfil their responsibility towards the shareholders by the payment of the dividends.

Basics of a Dividend

A token reward that is given to the shareholders of a company is known as the dividend. The dividends are paid only to the shareholders because they had invested their capital in the company. The profit is used to distribute dividends. The company keeps the major chunk of the profit with itself under the title of retained earnings so that the ongoing, as well as the future business activities of the company, can be carried on easily.

The remaining amount is then distributed amongst the shareholders under the head ‘dividends’. Sometimes, even when the company has not made sufficient profits, they still give rewards to the shareholders in the name of dividend payment. The idea behind distributing such dividend is to maintain their goodwill of distributing the dividends on a regular basis.

The decision of issuing dividends with several payment rates and over different time frames is taken by the Board of Directors. The dividends are to be issued over a regular time period such as annually, quarterly or monthly. For instance, Unilever PLC ADR, as well as Walmart Inc., are well known for making the payment of dividends on regular quarters.

In addition to these scheduled dividends, the companies can also exercise their discretion and make the distribution of the dividends that are non- recurring and special in nature.

Dividend Paying Companies

The companies that are large, established and are able to make huge profits are the best payers of the dividend. Such companies are famous for making regular payments of dividend as they aim to maximise the wealth of the shareholders in many ways along with the normal growth.

There are some companies in specific industries in the market that have been seen to make the dividend payment at a regular period. These industries are such as utilities, pharmaceuticals and healthcare, banks and financial, oil and gas, basic materials and so on.

Companies that are real estate investment trusts and master limited partnerships in nature are also among those companies which pay the maximum dividends. This is so because their position mandates them to distribute the dividends to those who hold the share in the equity of the company.

Further, there are other companies that are high growth in nature such as the biotech sector or technology sector along with the startups are not excepted to pay dividends on a regular basis. This is so because they might have an insufficiency of the fund on account of being at the nascent stage and investing a huge chunk of money in the operational activities, business expansion, research and development and so on.

Types of Dividend

There are various types of dividend. Some of them are as follows:

  • Cash Dividend: when the company pays directly to the shareholders in the form of the actual cash, such a mode of distributing dividend is know n as the cash dividend. Most of the times, the dividend is paid by way of the cash. The payment of these dividends is done by electronic method but they can be paid by the way of issuing cheque or cash.
  • Stock Dividend: When it is resolved by the Board of Directors to get the common stock issued to its common shareholders without the payment of any due consideration, such a dividend is known as a stock dividend. The salient feature if the stock dividend is that the company usually issues such shares that is less than twenty-five per cent of the total number of shares that were outstanding previously. On the other hand, if the issued shares are more than the limit of twenty-five per cent of the previously outstanding shares, then they are referred to as stock split. For getting a stock dividend recorded, a sum of money, which is equivalent to the fair value of the additional shares, has to be transferred from the amount that was retained by the company to either additional paid-in capital account or capital stock account. The fair value for the additional shares is calculated on the basis of the fair market value of such shares at the time of declaring the dividends. Further, they are issued on the basis of pro-rata that is dependent on the number of shares owned by the shareholder.
  • Property Dividend: A company is also empowered to issue dividends that are non- monetary in nature instead of issuing cash dividends or stock dividends. These dividends are usually recorded on the basis of the fair market value at which the distribution of the assets takes place. There are high chances for a company to record the variations as a loss or gain because the fair market value is subjected to change somewhat from the book value of the assets as per the record of the company. Such a rule of accounting sometimes makes it mandatory for a company to issue property dividends so that the reported or taxable income of the company can be altered.
  • Scrip Dividend: sometimes a company is not in the condition to issue dividends in the near future, so it comes to the conclusion of issuing scrip dividends. These dividends are typically promissory notes that are issued to shareholders to be paid on a later date. Such a dividend makes a note payable.
  • Liquidating Dividend: when it is resolved by the board to directors to return the principal amount that was invested in the company by the shareholder in the form of the dividends, such a dividend is termed as the liquidating dividend. Such dividends can be a prior fact informing that the business is about to get shut down. The method of accounting these liquidating dividend is similar to the method used for entries for a cash dividend.

Impact of Dividends on Share Price

A company cannot call off the dividends once they are issued. The payment of these dividends result in the expenditure of a company and is placed under the head of liability in the books of the company and the accounts of the business. Thus, the payment of the dividend has an impact on the share prices of the company.

The price of the shares rises by an amount that is equivalent to the amount at which the dividends are issued. Similarly, the share price falls down by the equivalent amount at the opening session of the ex-date.


Suggested Readings

  1. Depositories- Meaning & Its Types(Opens in a new browser tab)
Akriti Gupta
Author: Akriti Gupta

Akriti Gupta is a fourth-year learner of BBA LLB programme in Symbiosis Law School, NOIDA. She has done moots and has various publications in her name. Mooting and research papers have helped her a lot to enhance her researching and drafting abilities.

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