Dividend

A dividend is a payment made by a corporation to its shareholders, usually as a

distribution of profits.[1] When a corporation earns a profit or surplus, the
corporation is able to re-invest the profit in the business (called retained earnings)
and pay a proportion of the profit as a dividend to shareholders. Distribution to
shareholders may be in cash (usually a deposit into a bank account) or, if the
corporation has a dividend reinvestment plan, the amount can be paid by the issue
of further shares or share repurchase.[2][3]
A dividend is allocated as a fixed amount per share, with shareholders receiving a
dividend in proportion 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 been distributed as
dividends) are shown in the shareholders' equity section on the company's balance
sheet the same as its issued share capital. Public companiesusually 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 are often considered to be a pre-tax expense.
The word "dividend" comes from the Latin word "dividendum" ("thing to be
divided")

History
Further information: Financial history of the Dutch Republic and Dutch East India
Company

In financial history of the world, the Dutch East India Company (VOC) was the
first recorded (public) company ever to pay regular dividends.[5][6][7] The VOC paid
annual dividends worth around 18 percent of the value of the shares for almost 200
years of existence (16021800).[8]

Forms of payment
Cash dividends are the most common form of payment and are paid out in
currency, usually via electronic funds transfer or a printed paper check. Such
dividends are a form of investment income and are usually taxable to the recipient
in the year they are paid. This is the most common method of sharing corporate
profits with the shareholders of the company. For each share owned, a declared
amount of money is distributed. Thus, if a person owns 100 shares and the cash
dividend is 50 cents per share, the holder of the stock will be paid $50. Dividends
paid are not classified as an expense, but rather a deduction of retained earnings.
Dividends paid does not show up on an income statement but does appear on
the balance sheet.
Stock or scrip dividends are those paid out in the form of additional stock shares
of the issuing corporation, or another corporation (such as its subsidiary
corporation). They are usually issued in proportion to shares owned (for example,
for every 100 shares of stock owned, a 5% stock dividend will yield 5 extra
shares).
Nothing tangible will be gained if the stock is split because the total number of
shares increases, lowering the price of each share, without changing the market
capitalization, or total value, of the shares held. (See also Stock dilution.)
Stock dividend distributions are issues of new shares made to limited partners by
a partnership in the form of additional shares. Nothing is split, these shares
increase the market capitalization and total value of the company at the same time
reducing the original cost basis per share.
Stock dividends are not includable in the gross income of the shareholder for US
income tax purposes. Because the shares are issued for proceeds equal to the pre-
existing market price of the shares; there is no negative dilution in the amount
recoverable.

Property dividends or dividends in specie (Latin for "in kind") are those paid out
in the form of assets from the issuing corporation or another corporation, such as a
subsidiary corporation. They are relatively rare and most frequently are securities
of other companies owned by the issuer, however they can take other forms, such
as products and services.

Interim dividends are dividend payments made before a company's Annual

General Meeting (AGM) and final financial statements. This declared dividend
usually accompanies the company's interim financial statements.

Other dividends can be used in structured finance. Financial assets with a known
market value can be distributed as dividends; warrants are sometimes distributed in
this way. For large companies with subsidiaries, dividends can take the form of
shares in a subsidiary company. A common technique for "spinning off" a
company from its parent is to distribute shares in the new company to the old
company's shareholders. The new shares can then be traded independently.
Reliability of dividends
Two metrics are commonly used to examine a firm's dividend policy.
Payout ratio is calculated by dividing the company's dividend by the earnings per
share. A payout ratio greater than 1 means the company is paying out more in
dividends for the year than it earned.
Dividend cover is calculated by dividing the company's cash flow from
operations by the dividend. This ratio is apparently popular with analysts
of income trusts in Canada.[citation needed] Dividends are payments made by a
corporation to its shareholder members. It is the portion of corporate profits paid
out to stockholders.

Dividend dates
A dividend that is declared must be approved by a company's board of
directors before it is paid. For public companies, four dates are relevant regarding
dividends:[12]
Declaration date the day the board of directors announces its intention to pay a
dividend. On that day, a liability is created and the company records that liability
on its books; it now owes the money to the stockholders.
In-dividend date the last day, which is one trading day before the ex-dividend
date, where the stock is said to be cum dividend ('with [including] dividend'). In
other words, existing holders of the stock and anyone who buys it on this day will
receive the dividend, whereas any holders selling the stock lose their right to the
dividend. After this date the stock becomes ex dividend.
Ex-dividend date the day on which shares bought and sold no longer come
attached with the right to be paid the most recently declared dividend. In the
United States, it is typically 2 trading days before the record date. This is an
important date for any company that has many stockholders, including those that
trade on exchanges, to enable reconciliation of who is entitled to be paid the
dividend. Existing holders of the stock will receive the dividend even if they sell
the stock on or after that date, whereas anyone who bought the stock will not
receive the dividend. It is relatively common for a stock's price to decrease on the
ex-dividend date by an amount roughly equal to the dividend paid. This reflects the
decrease in the company's assets resulting from the declaration of the dividend.
Book closure date when a company announces a dividend, it will also announce
a date on which the company will ideally temporarily close its books for fresh
transfers of stock, which is also usually the record date.
Record date shareholders registered in the company's record as of the record
date will be paid the dividend. Shareholders who are not registered as of this date
will not receive the dividend. Registration in most countries is essentially
automatic for shares purchased before the ex-dividend date.
Payment date the day on which the dividend cheque will actually be mailed to
shareholders or credited to their bank account.

Dividend-reinvestment
Some companies have dividend reinvestment plans, or DRIPs, not to be confused
with scrips. DRIPs allow shareholders to use dividends to systematically buy small
amounts of stock, usually with no commission and sometimes at a slight discount.
In some cases, the shareholder might not need to pay taxes on these re-invested
dividends, but in most cases they do.

Dividend taxation
Main article: Dividend tax

Most countries impose a corporate tax on the profits made by a company. A

dividend paid by a company is not an expense of the company, but is income of the
shareholder. The tax treatment of this dividend income varies considerably
between countries:
United States and Canada
The United States and Canada impose a lower tax rate on dividend income than
ordinary income, on the assertion that company profits had already been taxed
as corporate tax.
Australia and New Zealand
Australia and New Zealand have a dividend imputation system, wherein companies
can attach franking credits or imputation credits to dividends. These franking
credits represent the tax paid by the company upon its pre-tax profits. One dollar of
company tax paid generates one franking credit. Companies can attach any
proportion of franking up to a maximum amount that is calculated from the
prevailing company tax rate: for each dollar of dividend paid, the maximum level
of franking is the company tax rate divided by (1 - company tax rate). At the
current 30% rate, this works out at 0.30 of a credit per 70 cents of dividend, or
42.857 cents per dollar of dividend. The shareholders who are able to use them,
apply these credits against their income tax bills at a rate of a dollar per credit,
thereby effectively eliminating the double taxation of company profits.
United Kingdom
Dividends from UK companies are paid out of profits after corporation tax
(Corporation tax is at 20% but decreases to 19% from 1 April 2017 - split periods
have pro-rata applied). Dividend income is taxable on UK residents at the rate of
7.5% for basic rate payers, 32.5% for higher rate tax payers and 38.1% for
additional rate payers. The income tax on dividend receipts is collected via
personal tax returns. The first 5,000 of dividend income is not taxed, however
dividend income above that amount is subject to the rate that would have applied if
the 5,000 exemption had not been given. UK limited companies do not pay tax on
dividends received from their investments or from their subsidiaries. This is
classed as "franked investment income".
India
In India, companies declaring or distributing dividend, are required to pay a
Corporate Dividend Tax in addition to the tax levied on their income. The dividend
received by the shareholders is then exempt in their hands.Dividend-paying firms
in India fell from 24 per cent in 2001 to almost 16 per cent in 2009 before rising to
19 per cent in 2010.[13] However, dividend income over and above Rs. 1,000,000
shall attract 10 per cent dividend tax in the hands of the shareholder with effect
from April 2016.

Effect on stock price

After a stock goes ex-dividend (i.e. when a dividend has just been paid, so there is
no anticipation of another imminent dividend payment), the stock price should
drop.
To calculate the amount of the drop, the traditional method is to view the financial
effects of the dividend from the perspective of the company. Since the company
has paid say x in dividends per share out of its cash account on the left hand side
of the balance sheet, the equity account on the right side should decrease an
equivalent amount. This means that a x dividend should result in a x drop in the
share price.
A more accurate method of calculating this price is to look at the share price and
dividend from the after-tax perspective of a share holder. The after-tax drop in the
share price (or capital gain/loss) should be equivalent to the after-tax dividend. For
example, if the tax of capital gains Tcg is 35%, and the tax on dividends Td is
15%, then a 1 dividend is equivalent to 0.85 of after tax money. To get the same
financial benefit from a capital loss, the after tax capital loss value should equal
0.85. The pre-tax capital loss would be 0.85/(1-Tcg) = 0.85/(1-35%) =
0.85/65% = 1.30. In this case, a dividend of 1 has led to a larger drop in the
share price of 1.30, because the tax rate on capital losses is higher than the
dividend tax rate.
Finally, security analysis that does not take dividends into account may mute the
decline in share price, for example in the case of a Priceearnings ratio target that
does not back out cash; or amplify the decline, for example in the case of Trend
following.
Criticism
Some believe that company profits are best re-invested in the company: research
and development, capital investment, expansion, etc. Proponents of this view (and
thus critics of dividends per se) suggest that an eagerness to return profits to
shareholders may indicate the management having run out of good ideas for the
future of the company. Some studies, however, have demonstrated that companies
that pay dividends have higher earnings growth, suggesting that dividend payments
may be evidence of confidence in earnings growth and sufficient profitability to
fund future expansion.[14]
Taxation of dividends is often used as justification for retaining earnings, or for
performing a stock buyback, in which the company buys back stock, thereby
increasing the value of the stock left outstanding.
When dividends are paid, individual shareholders in many countries suffer
from double taxation of those dividends:
 1. the company pays income tax to the government when it earns any income,
and then
2. when the dividend is paid, the individual shareholder pays income tax on the
dividend payment.
In many countries, the tax rate on dividend income is lower than for other forms of
income to compensate for tax paid at the corporate level.
A capital gain should not be confused with a dividend. Generally, a capital gain
occurs where a capital asset is sold for an amount greater than the amount of its
cost at the time the investment was purchased. A dividend is a parsing out a share
of the profits, and is taxed at the dividend tax rate. If there is an increase of value
of stock, and a shareholder chooses to sell the stock, the shareholder will pay a tax
on capital gains (often taxed at a lower rate than ordinary income). If a holder of
the stock chooses to not participate in the buyback, the price of the holder's shares
could rise (as well as it could fall), but the tax on these gains is delayed until the
sale of the shares.
Certain types of specialized investment companies (such as a REIT in the U.S.)
allow the shareholder to partially or fully avoid double taxation of dividends.
Shareholders in companies that pay little or no cash dividends can reap the benefit
of the company's profits when they sell their shareholding, or when a company is
wound down and all assets liquidated and distributed amongst shareholders. This,
in effect, delegates the dividend policy from the board to the individual
shareholder. Payment of a dividend can increase the borrowing requirement,
or leverage, of a company.

Other corporate entities

Cooperatives
Cooperative businesses may retain their earnings, or distribute part or all of them
as dividends to their members. They distribute their dividends in proportion to their
members' activity, instead of the value of members' shareholding. Therefore, co-op
dividends are often treated as pre-tax expenses. In other words, local tax or
accounting rules may treat a dividend as a form of customer rebate or a staff bonus
to be deducted from turnover before profit (tax profit or operating profit) is
calculated.
Consumers' cooperatives allocate dividends according to their members' trade with
the co-op. For example, a credit union will pay a dividend to represent interest on a
saver's deposit. A retail co-op store chain may return a percentage of a member's
purchases from the co-op, in the form of cash, store credit, or equity. This type of
dividend is sometimes known as a patronage dividend or patronage refund, as
well as being informally named divi or divvy.
Producer cooperatives, such as worker cooperatives, allocate dividends according
to their members' contribution, such as the hours they worked or their salary.[18]
Trusts
In real estate investment trusts and royalty trusts, the distributions paid often will
be consistently greater than the company earnings. This can be sustainable because
the accounting earnings do not recognize any increasing value of real estate
holdings and resource reserves. If there is no economic increase in the value of the
company's assets then the excess distribution (or dividend) will be a return of
capital and the book value of the company will have shrunk by an equal amount.
This may result in capital gains which may be taxed differently from dividends
representing distribution of earnings.
Mutuals
The distribution of profits by other forms of mutual organization also varies from
that of joint-stock companies, though may not take the form of a dividend.
In the case of mutual insurance, for example, in the United States, a distribution of
profits to holders of participating life policies is called a dividend. These profits are
generated by the investment returns of the insurer's general account, in which
premiums are invested and from which claims are paid. [19] The participating
dividend may be used to decrease premiums, or to increase the cash value of the
policy. [20] Some life policies pay nonparticipating dividends. As a contrasting
example, in the United Kingdom, the surrender value of a with-profits policy is
increased by a bonus, which also serves the purpose of distributing profits. Life
insurance dividends and bonuses, while typical of mutual insurance, are also paid
by some joint stock insurers.
Insurance dividend payments are not restricted to life policies. For example,
general insurer State Farm Mutual Automobile Insurance Company can distribute
dividends to its vehicle insurance policyholders.[21]
Types of Dividends
The Dividends are the proportion of revenues paid to the shareholders. The
amount to be distributed among the shareholders depends on the earnings of the
firm and is decided by the board of directors.

Types:
1. Cash Dividend: It is one of the most common types of dividend paid in cash. The
shareholders announce the amount to be disbursed among the shareholder on the
date of declaration. Then on the date of record, the amount is assigned to the
shareholders and finally, the payments are made on the date of payment. The
companies should have an adequate retained earnings and enough cash balance to
pay the shareholders in cash.
2. Scrip Dividend: Under this form, a company issues the transferable promissory
note to the shareholders, wherein it confirms the payment of dividend on the future
date.A scrip dividend has shorter maturity periods and may or may not bear any
interest. These types of dividend are issued when a company does not have enough
liquidity and require some time to convert its current assets into cash.
3. Bond Dividend: The Bond Dividends are similar to the scrip dividends, but the
only difference is that they carry longer maturity period and bears interest.
4. Stock Dividend/ Bonus Shares: These types of dividend are issued when a
company lacks operating cash, but still issues, the common stock to the
shareholders to keep them happy.The shareholders get the additional shares in
proportion to the shares already held by them and dont have to pay extra for these
bonus shares. Despite an increase in the number of outstanding shares of the firm,
the issue of bonus shares has a favorable psychological effect on the investors.
5. Property Dividend: These dividends are paid in the form of a property rather than
in cash. In case, a company lacks the operating cash; then non-monetary dividends
are paid to the investors.The property dividends can be in any form: inventory,
asset, vehicle, real estate, etc. The companies record the property given as a
 dividend at a fair market value, as it may vary from the book value and then record
the difference as a gain or loss.
6. Liquidating Dividend: When the board of directors decides to pay back the
original capital contributed by the equity shareholders as dividends, is called as a
liquidating dividend. These are usually paid at the time of winding up of the
operations of the firm or at the time of final closure.

Thus, it is found out that usually the dividends are paid in cash, but however in
certain situations, there could be the other forms of dividend as explained above.

Cash Dividend Example

On February 1, ABC International's board of directors declares a cash dividend

of $0.50 per share on the company's 2,000,000 outstanding shares, to be paid
on June 1 to all shareholders of record on April 1. On February 1, the company
records this entry:
Debit Credit

Retained earnings 1,000,000

Dividends payable 1,000,000

On June 1, ABC pays the dividends, and records the transaction with this entry:
 Debit Credit

Dividends payable 1,000,000

Cash 1,000,000

Stock Dividend Example

ABC International declares a stock dividend to its shareholders of 10,000

shares. The fair value of the stock is $5.00, and its par value is $1. ABC records
the following entry:

Debit Credit

Retained earnings 50,000

Common stock, $1 par value 10,000

Additional paid-in capital 40,000

Property Dividend Example

ABC International's board of directors elects to declare a special issuance of

500 identical, signed prints by Pablo Picasso, which the company has stored in
a vault for a number of years. The company originally acquired the prints for
$500,000, and they have a fair market value as of the date of dividend
declaration of $4,000,000. ABC records the following entry as of the date of
declaration to record the change in value of the assets, as well as the liability to
pay the dividends:

Debit Credit

Long-term investments - artwork 3,500,000

Gain on appreciation of artwork 3,500,000

Debit Credit

Retained earnings 4,000,000

Dividends payable 4,000,000

On the dividend payment date, ABC records the following entry to record the
payment transaction:

Debit Credit

Dividends payable 4,000,000

Long-term investments - artwork 4,000,000

Scrip Dividend Example

ABC International declares a $250,000 scrip dividend to its shareholders that
has a 10 percent interest rate. At the dividend declaration date, it records the
following entry:

Debit Credit

Retained earnings 250,000

Notes payable 250,000

The date of payment is one year later, so that ABC has accrued $25,000 in
interest expense on the notes payable. On the payment date (assuming no prior
accrual of the interest expense), ABC records the payment transaction with this
entry:

Debit Credit

Notes payable 250,000

Interest expense 25,000

Cash 275,000

Liquidating Dividend Example

ABC International's board of directors declares a liquidating dividend of

$1,600,000. It records the dividend declaration with this entry:
 Debit Credit

Additional paid-in capital 1,600,000

Dividends payable 1,600,000

On the dividend payment date, ABC records the following entry to record the
payment transaction:

Debit Credit

Dividends payable 1,600,000

Cash 1,600,000

Dividend, Rate of Dividend

The part of the annual profit of a company distributed among its shareholders is
called dividend. The dividend is always reckoned on the face value of a share
irrespective of its MV.

The rate of dividend is expressed as a percentage of the NV of a share per annum.

Meaning of the statement r% Rs 100 at Rs M

The statement r% Rs 100 shares at Rs M means the following:

The NV of a share is Rs 100.

The MV of a share is Rs M.
The dividend on a share is r% of NV, i.e., Rs r per annum.
An investment of Rs M gives an annual income of Rs r.
 Rate of return per annum = Annual income from an investment of Rs

100

Look at the statement given below:

9% Rs 100 shares at Rs 120 means

Face value (NV) of 1 share = Rs 100.
Market value (MV) of 1 share = Rs 120.
The dividend on a share is 9% of its face value = 9% of Rs 100 = Rs 9
An investment of Rs 120 gives an annual income of Rs 9.
Rate of return per annum = Annual income from an investment of Rs

100

Formula

1. Sum invested = No. of shares bought MV of 1 share

2. No. of shares bought

Also, no. of shares bought from 1

share

3. Income (return or profit) = (No. of shares) (rate of dividend) (NV) =(No. of

shares) (Dividend on 1 share)

4. Return % = Income (profit) %

NOTE: The face value of a share remains the same. The market value of a share
changes from time to time.

Shares

A share is a unit of account for various investments. It often means

the stock of a corporation, but is also used for collective investments
such as mutual funds, limited partnerships, and real estate investment
trusts.
Corporations issue shares which are offered for sale to raise share
capital. The owner of shares in the corporation is a shareholder (or
stockholder) of the corporation.[2] A share is an indivisible unit of capital,
expressing the ownership relationship between the company and the
shareholder. The denominated value of a share is its face value, and the
total of the face value of issued shares represent the capital of a
company,[3] which may not reflect the market value of those shares.
The income received from the ownership of shares is a dividend. The
process of purchasing and selling shares often involves going through
a stockbroker as a middle man.

Types of Shares
The capital of the company can be divided into different units with definite value
called shares. Holders of these shares are called shareholders or members of the
company. There are two types of shares which a company may issue (1) Preference
Shares (2) Equality Shares.
(1) Preferences Shares
Shares which enjoy the preferential rights as to dividend and repayment of capital
in the event of winding up of the company over the equity shares are called
preference shares. The holder of preference shares will get a fixed rate of dividend.

Preference shares may be:

(a) Cumulative Preference Share

If the company does no earn adequate profit in any year, dividends on preference
shares may not be paid for that year. But if the preference shares are cumulative
such unpaid dividends on these shares go on accumulating and become payable out
of the profits of the company, in subsequent years. Only after such arrears have
been paid off, any dividend can be paid to the holder of quality shares. Thus a
cumulative preference shareholder is sure to receive dividend on his shares for all
the years our of the earnings of the company.

(b) Non-cumulative Preference Shares

The holders of non-cumulative preference shares no doubt will get a preferential
right in getting a fixed dividend it is distributed to quality shareholders. The fixed
dividend is to be paid only out of the divisible profits but if in a particular year
there is no profit as to distribute it among the shareholders, the non-cumulative
preference shareholders, will not get any dividend for that year and they cannot
claim it in the next year during which period there might be profits. If it is not paid,
it cannot be carried forward. These shares will be treated on the same footing as
other preference shareholders as regards payment of capital in concerned.

(c) Redeemable Preference Shares

Capital raised by issuing shares, is not to be repaid to the shareholders (except buy
back of shares in certain conditions) but capital raised through the issue of
redeemable preference shares is to be paid back by the raised thought the issue of
redeemable preference shares is to be paid back to the company to such
shareholders after the expiry of a stipulated period, whether the company is wound
up or not. As per section (80) 5a, a company after the commencement of the
Companies (Amendment) Act, 1988 cannot issue any preference shares which are
irredeemable or redeemable after the expiry of a period of 10 years from the date
of its issue. It means a company can issue redeemable preference share which are
redeemable within 10 years from the date of their issue.

(d) Participating or Non-participating Preference Shares

The preference shares which are entitled to a share in the surplus profit of the
company in addition to the fixed rate of preference dividend are known as
participating preference shares. After the payment of the dividend a part of surplus
is distributed as dividend among the quality shareholders at a particulate rate. The
balance may be shared both by equity shareholders at a particular rate. The balance
may be shared both by equity and participating preference shares. Thus
participating preference shareholders obtain return on their capital in two forms (i)
fixed dividend (ii) share in excess of profits. Those preference shares which do not
carry the right of share in excess profits are known as non-participating preference
shares.

(2) Equity Shares

Equity shares will get dividend and repayment of capital after meeting the claims
of preference shareholders. There will be no fixed rate of dividend to be paid to the
equity shareholders and this rate may vary form year to year. This rate of dividend
is determined by directors and in case of larger profits, it may even be more than
the rate attached to preference shares. Such shareholders may go without any
dividend if no profit is made.

Shares and Dividends

Certain business organizations need to raise money from public. In India, such an
organization needs to be registered under the Indian Companies Act. Such an
organization is called a public limited company.

A company may need money to start business or to start a new project. The sum of
money required is called capital. The required capital is divided into small equal
parts, and each part is called share. The company prepares a detailed plan of the
proposed project and frames rules and regulations regarding its functioning. They,
then, draft a proposal, issue a prospectus, explaining the plan of the project and
invite the public to invest money in their project. They, thus, pool up the required
funds from the public, by assigning them shares of the company. The value of a
share may be Re 1, Rs 10, Rs 100, Rs 1000, etc. The capital is raised by selling
these shares. A person who purchases shares of the company becomes a
shareholder of the company.

Value of shares

The original value of a share printed in the certificate of the share is called its face
value or nominal value (in short, NV). The NV of a share is also known as
register value, printed value and par value. The price at which the share is sold or
purchased in the capital market through stock exchanges is called its market value
(in short, MV).

A share is said to be:

At premium or Above par, if its market value is more than its face value.
At par, if its market value equals its face value.
At discount or Below par, if its market value is less than its face value.

The share of a company that is doing well or expected to do well is sold in the
market at a price higher than its NV. In such a situation, we say the share is at
premium or above par. For example, if a share of NV of Rs 10 is selling at Rs 16
then the share is at a premium of Rs 6. The share of a company that is neither
doing well nor poorly is sold in the market at a price equal to its NV. For example,
if a share of NV of Rs 100 is selling at Rs 100 then the share is at par. The share of
a company that is doing poorly or may do poorly in the future is sold in the market
at a price lower than its NV. In such a case, we say the share is at a discount or
below par. For example, if a share of NV of Rs 100 is selling at Rs 80 then the
share is at a discount of Rs 20.