Dividend
A dividend is the distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business. The current year's profit as well as the retained earnings of previous years are available for distribution; a corporation is usually prohibited from paying a dividend out of its capital. Distribution to shareholders may be in cash or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or by share repurchase. In some cases, the distribution may be of assets.
The dividend received by a shareholder is treated as the income of the shareholder and may be subject to income tax. The tax treatment of this income varies considerably between jurisdictions. The corporation does not receive a tax deduction for the dividends it pays.
A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in proportion to their shareholding. Dividends can provide at least temporarily stable income and raise morale among shareholders, but are not guaranteed to continue. For the joint-stock company, paying dividends is not an expense; rather, it is the division of after-tax profits among shareholders. Retained earnings are shown in the shareholders' equity section on the company's balance sheet - the same as its issued share capital. Public companies usually pay dividends on a fixed schedule, but may cancel a scheduled dividend, or declare an unscheduled dividend at any time, sometimes called a special dividend to distinguish it from the regular dividends. More usually, a special dividend is paid at the same time as the regular dividend, but for a one-off higher amount. Cooperatives, on the other hand, allocate dividends according to members' activity, so their dividends are often considered to be a pre-tax expense.
The usually fixed payments to holders of preference shares are classed as dividends. The word dividend comes from the Latin word dividendum.
History
The Dutch East India Company was the first recorded company to pay regular dividends. The VOC paid annual dividends worth around 18 percent of the value of its shares for almost 200 years of its existence.In common law jurisdictions, courts have typically refused to intervene in companies' dividend policies, giving directors wide discretion as to the declaration or payment of dividends. The principle of non-interference was established in the Canadian case of Burland v Earle, the British case of Bond v Barrow Haematite Steel Co, and the Australian case of Miles v Sydney Meat-Preserving Co Ltd. However in Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd the Supreme Court of New South Wales broke with this precedent and recognised the shareholder's contractual right to a dividend.
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 of the shareholder, usually treated as earned in the year they are paid. 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 do not appear on an income statement, but do appear on the balance sheet.Different classes of stocks have different priorities when it comes to dividend payments. Preferred stocks have priority claims on a company's income. A company must pay dividends on its preferred shares before distributing income to common share shareholders.
Stock or scrip dividends are those paid out in the form of additional shares of the issuing corporation, or another corporation. They are usually issued in proportion to shares owned.
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 total value of the shares held.
Stock dividend distributions do not affect the market capitalization of a company. 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 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 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 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.
Payout ratio
A dividend payout ratio characterizes how much of a company's earnings is paid out in the form of dividends.Most often, the payout ratio is calculated based on dividends per share and earnings per share:
A payout ratio greater than 100% means the company paid out more in dividends for the year than it earned.
Since earnings are an accountancy measure, they do not necessarily closely correspond to the actual cash flow of the company. Hence another way to determine the safety of a dividend is to replace earnings in the payout ratio by free cash flow. Free cash flow is the business's operating cash flow minus its capital expenditures: this is a measure of how much incoming cash is "free" to pay out to stockholders and/or to grow the business.
A free cash flow payout ratio greater than 100% means the company paid out more cash in dividends for the year than the "free" cash it took in.
Dividend dates
A dividend that is declared must be approved by a company's board of directors before it is paid. For public companies in the US, four dates are relevant regarding dividends: The position in the UK is very similar, except that the expression "in-dividend date" is not used.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 shareholders.
In-dividend date – the last day, which is one trading day before the ex-dividend date, where shares are said to be cum dividend. That is, existing shareholders and anyone who buys the shares on this day will receive the dividend, and any shareholders who have sold the shares lose their right to the dividend. After this date the shares 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 and many European countries, it is typically one trading day before the record date. This is an important date for any company that has many shareholders, including those that trade on exchanges, to enable reconciliation of who is entitled to be paid the dividend. Existing shareholders will receive the dividend even if they sell the shares on or after that date, whereas anyone who bought the shares will not receive the dividend. It is relatively common for a share's price to decrease on the ex-dividend date by an amount roughly equal to the dividend being paid, which reflects the decrease in the company's assets resulting from the payment of the dividend.
Book closure date – when a company announces a dividend, it will also announce the date on which the company will temporarily close its books for share transfers, 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, while 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 dividend cheques will actually be mailed to shareholders or the dividend amount credited to their bank account.