Dividend
Dividends are payments by a corporation to shareholders that are given to shareholders and represent a return on the capital directly or indirectly contributed to the corporation by the shareholders.
Some important characteristics of dividends include the following:
- The payment of dividends is at the discretion of the board of directors. If dividends are declared it is not a liability of the corporation. A corporation cannot default on an undeclared dividend. As a consequence, corporations cannot become bankrupt because of nonpayment of dividends. The amount of dividend and even whether it is paid are decisions made by the board of directors.
- The payment of dividends by the corporation is not a business expense. Dividends are not deductible for corporate tax purposes. In short dividends are paid out of the corporations aftertax profits.
- Dividends received by individual shareholders are taxable. However, corporations that own stock in other corporations are permitted to exclude 70 percent of the dividend amounts they receive and are taxed only the remaining 30 percent. The 70/30 rule only applies when the recipient owns less than 20 percent of the outstanding stock in the corporation.
History of Dividends
Forms of Dividends and How They are Paid
Dividends can come in several different forms. The basic forms regarding corporate finance include Cash, Stock, and Stock Repurchase.
The basic types of cash dividends are:
1. Regular Cash Dividends
Regular Cash Dividend is defined as a cash payment made by a firm to its owners in the normal course of business, usually made four times per year. Cash dividends are also the most common type of dividends. Regular Cash Dividends are commonly seen with public companies. The cash payments are made directly to shareholders and on a regular basis.
2. Extra Dividends
In addition to the regular cash payments sometimes firms will pay an extra cash dividend. An extra cash payment is an additional dividend payment, that may or may not be repeated.
3. Special Dividends
Similar to the extra cash dividend is the special dividend, which is an uncommon or one time payment. Special dividends are usually not repeated. When special dividends are declared it is usually because of strong company earnings and is a way to share the profits with shareholders. [1]
4. Liquidating Dividends
Dividend Policy
Dividend Policy asks the question: Should the firm pay out money to its shareholders , or should the firm take money and invest it for the shareholders.
Current Policy:
Alternative Policy:
Establishing a Dividend Policy
Low Payout vs. High Payout
Stock Dividends and Splits
- ↑ Special dividends can also occur when a company wishes to make changes to its financial structure or to spin off a subsidiary company to its shareholders.