What is Dividend and its Types? | Meaning and Different Types of Dividends
What is Dividend?
In the stock market, a dividend refers to the reward or payment to investors who hold shares of the company. When a company earns good profit then it can decide to declare dividends to its shareholders, The declaration of dividends can be done by the company’s board of directors. The payment of dividends can be in the form of Cash or additional shares, depending on what the company prefers. Generally, the dividends are paid on a regular schedule, such as quarterly, semi-annually, or annually.
What is the main purpose of dividends?
To Distribute Dividend Income to its Shareholders: The main purpose of a dividend is to provide dividend income to its investors to provide them a direct source of income. This distribution is not only income or reward to the shareholders but it also shows the financial health of the company.
It Attracts more investors: When the dividend is distributed to its shareholders, it shows the company’s financial health and performance which means the company is doing great and has growth potential. This signal attracts more investors to invest in the company for future growth.
Signal of good financial health: If a company consistently pays its shareholders dividends, it shows its financial stability and confidence in its future earnings potential. Which is a good signal to the investor that the company is doing well.
How do Companies pay Dividends?
Dividend Announcement: The company’s board of directors decides to declare the dividend during the board meeting on the announcement date.
Ex-Dividend Date: An ex-dividend date is a date of one business day before the record date This means if you purchase stock on or after the ex-dividend date then you are not eligible for the dividend. To be eligible for dividend you have to buy the stock before the ex-dividend date.
Record Date: The record date is the date when the company checks the list of shareholders eligible to receive dividends. In short, we can say that the investor whose name is listed in the company’s books as of the record date will receive the dividend. So shareholders who have purchased shares on or before the record date are eligible for dividends.
Payment Date: This is the date when the company’s distribute the dividends to its eligible shareholders.
Types of Dividends
- Cash dividends
- Stock Dividends
- Property Dividends
- Scrip Dividends
- Liquidating Dividends
- Special Dividends
- Preferred Dividends
- Cash Dividend: A cash dividend is a type of dividend in which shareholders receive the dividend payment in cash, which the company sends directly to their bank account. In this dividend the payment will be done on a per share basis, suppose XYZ company declares Rs 45 per share dividend and you have 200 shares of XYZ company that means the dividend you will receive (200 x Rs 45 = Rs 9000) in your bank account.
- Stock Dividend: Companies can issue stock dividends instead of cash as an additional share to their shareholders. It is distributed on a percentage basis, suppose you have 500 shares of ABC company and this company declares 5% of the stock dividend so ( 500 X 5% = 25) that means 25 additional shares you will receive.
- Scrip Dividend: A Scrip dividend is a type of dividend where the company issues a promissory note that promises the payment of the dividend to its shareholders at a later date. This is typically done when a company does not have a sufficient fund to pay the dividend immediately.
- Property Dividend: A property dividend is a type of dividend where the company gives an asset or product as a gift to its shareholders instead of giving cash. The issuer uses the fair market value of the asset to calculate how much each shareholder will receive. Suppose there is a company XYZ that sells T-shirts, so it could decide to send a T-shirt as a dividend to each shareholder.
- Liquidating Dividend: Liquidation is the process when the company is in the process of winding up its operations and liquidating its assets. So, if a company closes up its operations then it distributes all its remaining assets after settling all liabilities to its shareholders. A liquidating dividend represents a return on the shareholders’ investment, reflecting the capital that was originally invested in the company.
- Special Dividend: A special dividend is a non-recurring dividend when the company pays the dividend to its shareholders at one time when the company has an excess of cash or extraordinary gains, such as from the sale of an asset. This type of dividend is not part of the company’s regular dividend policy and is used to distribute surplus funds to shareholders.
- Preferred Dividend: Preferred Dividend is a dividend for the preference shareholders because they have the priority to receive the fixed dividend at a fixed rate over the equity shareholders.
