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Dividends & Its Types

Dividends & Its Types

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Published by MD Kamaal

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Published by: MD Kamaal on Jun 25, 2012
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05/13/2014

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Dividends
are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.
 When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders. There are two ways to distribute cash to shareholders: share repurchases or dividends.
 Many corporations retain a portion of their earnings and pay the remainder as a dividend.A dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend inproportion to their shareholding. For the joint stock company, paying dividends is not an expense;rather, it is the division of after tax profits among shareholders. Retained earnings (profits that have not beendistributed as dividends) are shown in the shareholder equity section in the company's balance sheet -the same as its issued share capital.Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends.Cooperatives,on the other hand, allocate dividends according to members' activity, so their dividends areoften considered to be a pre-tax expense.Dividends are usually paid in the form of cash, store credits (common among retail consumers'cooperatives)and shares in the company (either newly created shares or existing shares bought in themarket.) Further, many public companies offer dividend reinvestment plans,which automatically use the cash dividend to purchase additional shares for the shareholder.The word "dividend" comes from the Latin word "
dividendum 
" ("thing to be divided").
(1)Regular Dividend.
By dividend we mean regular dividend paid annually, proposed by theboard of directors and approved by the shareholders in general meeting. It is also known as finaldividend because it is usually paid after the finalization of accounts. It sis generally paid in cash asa percentage of paid up capital, say 10 % or 15 % of the capital. Sometimes, it is paid per share.No dividend is paid on calls in advance or calls in arrears. The company is, however, authorised tomake provisions in the Articles prohibiting the payment of dividend on shares having calls inarrears.
(2) Interim Dividend.
If Articles so permit, the directors may decide to pay dividend at any timebetween the two Annual General Meeting before finalizing the accounts. It is generally declaredand paid when company has earned heavy profits or abnormal profits during the year anddirectors which to pay the profits to shareholders. Such payment of dividend in between the twoAnnual General meetings before finalizing the accounts is called Interim Dividend. No InterimDividend can be declared or paid unless depreciation for the full year (not proportionately) hasbeen provided for. It is, thus,, an extra dividend paid during the year requiring no need of approval of the Annual General Meeting. It is paid in cash.
 
 
(3) Stock-Dividend.
Companies, not having good cash position, generally pay dividend in theform of shares by capitalizing the profits of current year and of past years. Such shares are issuedinstead of paying dividend in cash and called 'Bonus Shares'. Basically there is no change in theequity of shareholders. Certain guidelines have been used by the company Law Board in respect of Bonus Shares.
(4) Scrip Dividend.
Scrip dividends are used when earnings justify a dividend, but the cashposition of the company is temporarily weak. So, shareholders are issued shares and debenturesof other companies. Such payment of dividend is called Scrip Dividend. Shareholders generally donot like such dividend because the shares or debentures, so paid are worthless for theshareholders as directors would use only such investment is which were not . Such dividend wasallowed before passing of the Companies (Amendment) Act 1960, but thereafter this unhealthypractice was stopped.
(5) Bond Dividends.
In rare instances, dividends are paid in the form of debentures or boundsor notes for a long-term period. The effect of such dividend is the same as that of paying dividendin scrips. The shareholders become the secured creditors is the bonds has a lien on assets.
(6) Property Dividend.
Sometimes, dividend is paid in the form of asset instead of payment of dividend in cash. The distribution of dividend is made whenever the asset is no longer required inthe business such as investment or stock of finished goods.But, it is, however, important to note that in India, distribution of dividend is permissible in theform of cash or bonus shares only. Distribution of dividend in any other form is not allowed.
 Dividend which is given between two annual general meeting before declaring final result of company.
2. Proposed Dividend
 Total amount of dividend which is offered to existing shareholders of company.
 Final dividend is given after declaring the final result of company in the form of financial statements.Final and proposed dividend will same if interim dividend is given in trial balance and final dividend isgiven outside of trial balance.
4. Unclaimed Dividend
 Unclaimed dividend is that dividend which declared by not claimed by a specific shareholder. Suppose,information of dividend was sent but letter was returned to company due to any reason.It will be shown in liability side till payment of dividend will not received by shareholder.

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