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Assignment: Financial Management: Dividend - Meaning
Assignment: Financial Management: Dividend - Meaning
TOPIC – Dividend Policy can be used to Maximize the Wealth of the Shareholder, Explain.
DIVIDEND - MEANING
Dividend is derived from the Latin word “Dividendum”. This means “that which is to be
distributed”. Earnings distribution to the shareholders according to their ownership proportion is
called as Dividend.
• All the shareholders of the company have share in dividend based on their ownership
proportion in the company. Dividend decision or dividend policy is defined as the ratio of
retained earnings to the distributed earnings.
• Dividend decision is interrelated with other three decision viz investment decisions, financing
decisions and liquidity decisions. Companies decide the proportion of earning to be distributed
as dividend and proportion of earnings to be retained with the objective of wealth maximization
of shareholders.
• The companies should find out the optimum dividend payout with risk return trade off
leading to the objective of shareholders wealth maximization. The firms have to decide the
form and timing of dividend payment.
Types of dividends:
1. Cash Dividend
2. Stock Dividend or Bonus Issue
3. Bond Dividend
4. Scrip Dividend or Promissory Note
5. Property Dividend
1. Cash Dividends: Such types of dividends are paid in cash, usually quarterly.
2. Stock dividend: Shareholders obtain new stock in the corporation as a form of a dividend.
Like a “stock split”, the number of shares increases, but no cash changes hands. Bonus
shares are therefore, shares allotted by capitalization of reserves or surplus of a corporate
enterprise. Such shares are issued to the equity shareholders according to their holdings of
the equity share capital of the company. But in India issue of stock dividend is not allowed.
Dividend has to be paid in cash. According to SEBI's guidelines on issue of bonus shares,
bonus shares cannot be issued in lieu of issue bonus shares frequently in addition to cash
dividend.
3. Scrip Dividend: It is the dividend given in the form of promissory notes to pay the amount
at a specific future date. The promissory note is known as scrip's or dividend certificates.
When a company is a regular dividend paying company but temporarily its cash position
is affected due to locking up of funds, which is likely to be released shortly, this opinion is
preferred. Scrip may or may not be interest bearing.
4. Bond Dividend: When company do not have adequate money to pay dividend in cash, it
may issue bonds for the amount due to the shareholders by way of dividends. It has longer
maturity date than Scrip dividend. It always carries interest. Thus, bondholders get regular
interest on their bonds besides payment of bond money on the due date. But this practice
is not visualized in India nor legally permitted.
5. Property Dividend: In case of such dividend the company pays dividend in the form of
assets other than cash. This may be in form of company's products. This type of dividend
is not common in India.
CLASSIFICATION OF DIVIDEND
Classified dividend based on the following categories Based on type of securities It can be
classified as Equity dividend and Preference dividend. Equity or Ordinary shareholders receive
equity dividend as they are the real owners of the company with voting rights. Equity dividend is
not fixed and depends on the earnings of the company. Investments in the preference share of the
company make the preference shareholders to receive fixed preference dividend. Preference
shareholders have preferential right for dividend while equity shareholders have preferential right
in capital during wound up. Based on source of payment According to section 2(35) of the
companies act, 2013, dividend can be paid from the following sources.
(i) From the profit of the current year
(ii) From last year profits
(iii) From the reserves and surplus
(iv) From the money given by central and state government for dividend and
(v) From the capital or assets of the company called as Liquidation dividend.