Monday, January 22, 2018

What One Should Know About The Types Of Dividend Payments

March 28, 2016 by  
Filed under Finance

Dividend is defined as a portion of the earnings of a company within a specified duration of time. It is paid out to the shareholders as determined by the board of directors. They may be in the form of shares of stock, property or cash. Such bonuses may be issued as one-off special payout amounts or as continuous payments as the value of the company continues to increase. There are different types of dividend payments that exist.

Investors need to understand that companies have a number of options as regards the handling of profits apart from allocating it to shareholders. For instance, they may decide to keep it within the company so that it forms part of the operating capital. The latter is what is termed retained earnings. Another option is for the company to use the profit to buy back its own shares (share buy-back) in the open market. Recommendations of the bonus have to be approved by the shareholders.

The dividend rate (the allocation for each owner or shareholder) can be quoted using one of two methods. The first is what is referred to as dividends per share (or simply, DPS). Here the payment is quoted in terms of dollars for each share held. The second method is known as the yield. In this approach, the payout is quoted as a percentage of the prevailing market price.

The commonest type of payment is the cash bonus. The directors determine the quoted payment on the day of declaration. The date on which this payment is allocated to the recipients is known as the date of record and the date on which the payments are received by the shareholders is known as the date of payment. The amount of money received is proportional to the number of shares held.

Another commonly issued type is the stock dividend. This type is given to shareholders when a company is cash-stripped but is still keen on keeping the investors happy. Instead of cash, the shareholders receive additional stocks at no extra cost. The additional shares received are proportional to those held by the individual shareholder. The total number of shares issued must be less than 25% of those previously outstanding. If they are more, the resultant transaction is known as a stock split.

Property dividends are also non-monetary. They may include any of the assets of a company such as vehicles, inventory, pieces of equipment and real estate properties among others. The company restates the fair market value of the distributed assets. This value may either be higher or lower than the book value which means that it will be captured either as a loss or a profit.

At times, the board of directors of a company may feel that they are not in a position to declare cash bonus any time in the near future. They may resolve to issue the shareholders with what are referred to as script dividends. This works as a promissory note in that the company will pay the bonus when the cash needed for this is available. A different interpretation of this payment is that it is the creation of new shares by the company.

There are situations that require shareholders receive their share of operating capital. One such situation is when the company is to be wound up. The payment that is given out in such a case is known as the liquidating dividend.

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