alexa
Indianmoney.com Missed Call Number

What is your Credit Score? Get FREE Credit Score in 1 Minute!

Get Start Now!
Home Articles What are the Types of Dividends?

What are the Types of Dividends?

IndianMoney.com Research Team | Updated On Friday, September 20,2019, 08:34 PM

5.0 / 5 based on 1 User Reviews

What are the Types of Dividends?

 

 

A dividend is paid when the company generates a profit and accumulates retained earnings. This profit can be reinvested in the business or can be distributed among shareholders. So, a dividend payment is made when the company distributes its profit among the shareholders of the company.

Want to know more on Financial Planning? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

What are Dividends?

A dividend is generally a cash payment issued by the company to its stockholders. If you have invested in company stock, then you can opt for the payment in dividends. The payment in dividends can be received if you invest in common stocks as well as in preferred stocks.

While the common stocks allow you to gain a sizable amount of profit through raising prices of shares and dividend payments the Preferred Stock pays a predetermined dividend. The dividends paid to common shareholders tend to vary according to the company’s fortunes. Dividends payments on preferred stock are often larger than those on either common stock or the company’s bonds.

Payment in dividends are important as it allows you to maximize your profits. Dividends also help you to reduce the portfolio risk and volatility. The dividend payment reduces your loss that occur from a sharp decline in stock prices.

See Also: Steps in the Financial Planning Process

How Does the Dividend Payment Work?

The value of the dividends is determined per share basis. Once the dividend payment is declared, it will be paid to you on a specific date known as the payable date. The payment is made equally to all the shareholders of the same class of assets i.e. common or preferred stocks. However, the payment of dividend will be given only after it is approved by the company’s board of directors.

Steps of how it works:

  • The company generates profits and retained earnings
  • On making profits the company decides to divide some excess profits among shareholders
  • The company’s Board of Directors approve the dividend payment
  • An announcement is made about the value of the share, the payable date and the record date
  • On the specified date, the payment of dividend is made to each shareholder.

See Also: Financial Planning for Youngsters

What are the Types of Dividend?

There are six types of dividend. Let’s try to understand how each of them functions:

Cash dividend:

Companies most often prefer this type of dividend payment. It is easy and the payment is made through cash and is sent directly from the company to the account of the shareholder. The payment is usually made electronically but sometimes it is also extended through Cheque.

For example, on 2 June the board of directors of SSP international declares a cash dividend of Rs. 250 per share on the company’s 2 lakh outstanding shares. The payment will be made four months later, i.e. 2nd October. So, on 2 June the company records the entry

 

Debit

Credit

Retained earning

5,00,00,000

 

Dividends payable

 

5,00,00,000

On the payable date, the company records the transaction of Rs. 5 crore and the payment of dividends in cash.

Stock dividend:

Stock dividends are paid to the shareholders by issuing new shares. People who have invested in common stocks can opt for stock dividend payment. Stock dividends are considered superior to cash dividends as the company is giving the shareholders the option to convert them into cash wherever they desire. The stocks dividends are paid based on the number of company stocks owned by the investors.

For instance, let’s assume a company 60-Degree Corp has announced to issue dividend of 30%. This means that each shareholder of the company will see a rise in their stock holdings by 30%. So, if earlier you had 100 shares of the company, then your share count is likely to go up by 30%. Which means that after receiving the dividends you will hold 130 units of shares in 60-Degree Corp.

Property dividend:

Companies are not limited to paying profit to shareholder only in the form of cash or stocks. A company may also choose to issue non-monetary payments to shareholders in the form of investment securities, physical assets, real estate and others.

ABC International's board of directors declared a special issuance of 500 identical, signed prints by a famous artist, which the company has stored in a vault for several years. The company originally acquired the prints for Rs. 50,00,000, and they have a fair market value as of the date of dividend declaration of Rs. 45,00,00,000.

Scrip dividend:

When the company do not have enough funds for issuing dividends in the near future then it issues a scrip dividend. Scrip dividend is a kind of promissory note that guarantees to pay the shareholders at a due date in future.

For example, let say Signa Inc’s share price is Rs. 100. The company pays Rs. 30 once per year as dividends. You own 100 shares in the company. If Sigma Inc. has a scrip dividend program, then you can choose to receive:

  • Rs. 30* 100 shares = Rs. 3000 in cash
  • Or
  • 3000/100 = 30 additional shares.

Liquidating dividend:

Companies with the intention of shutting down their business, pays their shareholders in the form of dividend then it is known as liquidating dividend. The payment of liquidating dividend is done when the company has settled the payments of creditors or lenders. It is the final payment made by the company before shutting down. Thus, accounting for liquidating dividend is like entries for cash dividend. The payments are made based on the number of shares held by the shareholder in the company.

Special dividend:

A special dividend is paid outside the company’s regular dividend payment policy. Special dividend is paid by the company when it makes an excess profit due to specific event like the sale of asset. Special dividends are known as extra dividends and the payments are generally higher than the normal dividends.

An example of special dividend is when HDFC bank declared a Special Interim Dividend of Rs 5 per share for the current fiscal, in commemoration of 25 years of the Bank’s operations. The bank’s board has decided 2nd august, 2019 as the record date for ascertaining the entitlement of special interim dividend.

You May Also Watch

Keep your Financial Cognizance up to date with IndianMoney App. Download NOW for simple tips & solutions for your financial wellbeing.

Have a complaint against any company? IndianMoney.com's complaint portal Iamcheated.com can help you resolve the issue. Just visit IamCheated.com and lodge your complaint. If you want to post a review on any company you can post it on Indianmoney.com review and complaint portal IamCheated.com.

Be Wise, Get Rich.

Realated Articles

 

Did you find this article useful? You can Rate us
5.0 / 5 based on 1 User Reviews
Article Author

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

What is your Credit Score? Get FREE Credit Score in 1 Minute!

Get Start Now!
CIBIL Meter
Get It now!
Attention!

This is to inform that Suvision Holdings Pvt Ltd ("IndianMoney.com") do not charge any fees/security deposit/advances towards outsourcing any of its activities. All stake holders are cautioned against any such fraud.