Dividends: Definition, Types of Dividends

types of dividendsShareholders are the owners of the joint-stock company. Generally, the company distributes a portion of its earnings to the shareholders. The part of the earnings, which is distributed among the shareholders, is called a dividend.

Dividends refer to that portion of the firm’s net earnings (amounts of profits that a company pays), which are paid out to the shareholders (people who own shares in the company).

Types of dividends

Dividend considered as a cash payment issued to the holders of company stock, however, some of which do not involve the payment of cash to shareholders.

Types of dividends are;

  • Cash Dividend
  • Stock Dividend
  • Property Dividend
  • Scrip Dividend
  • Liquidating Dividend
  • Bonus Share

Cash dividend

The cash dividend is by far the most common of the dividend types used. On the date of declaration, the board of directors resolves to pay a certain dividend amount in cash to those investors holding the company’s stock on a specific date.

The date of record is the date on which dividends are assigned to the holders of the company’s stock. On the date of payment, the company issues dividend payments.

Stock dividend

A stock dividend is an issuance by a company, of its common stock to its common shareholders without any consideration. If the company issues less than 25 percent of the total number of previously outstanding shares, you treat the transaction as a stock dividend.

If the transaction is for a greater proportion of the previously outstanding shares, then treat the transaction as a stock split.

To record a stock dividend, transfer from retained earnings to the capital stock anti additional paid-in capital accounts an amount equal to the fair value of the additional shares issued.

The fair value of the additional shares issued is based on their fair market value when the dividend is declared.

Property dividend

A company may issue a non-monetary dividend to investors, rather than making a cash or stock payment. Record this distribution at the fair market value of the assets distributed.

Since the fair market value is likely to vary somewhat from the book value of the assets, the company will likely record the variance as a gain or loss.

This accounting rule can sometimes lead a business to deliberately issue property dividends to alter their taxable and/or reported income.

Scrip dividend

A company may not have sufficient funds to issue dividends soon, so instead, it issues a scrip dividend, which is essentially a promissory note (which may or may not include interest) to pay shareholders at a later date.

This dividend creates a note payable.

Liquidating dividend

When the board of directors wishes to return the capital originally contributed by shareholders as a dividend, it is called a liquidating dividend. It may be a precursor to shutting down the business.

The accounting for a liquidating dividend is similar to the entries for a cash dividend, except that the funds are considered to come from the additional paid-in capital account.

Bonus Share

A bonus share is also called the stock dividend. Bonus shares are issued by the company when they have low operating cash, but still want to keep the investors happy.

Each equity shareholder receives a certain number of additional shares, depending on the number of shares originally owned by the shareholder.

For example, if a person possesses 10 shares of Company A, and the company declares a bonus store issue-of 1 for every 2 shares, the person will get 5 additional Shares in his account.

From the company’s angle, the no. of shares and issued capital in the company will increase by 50% (1/2 shares); The market price, EPS, DPS, etc. wifi be adjusted accordingly.

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