Friday, April 1, 2016

The Main Types Of Dividend Payments

By David Schmidt


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.

There are two main ways of quoting the allocation for each shareholder (or dividend rate). The first option is to quote it in dollars (or any other unit of currency) for each share held (also referred to as dividends per share, DPS). The second option is to quote the allocation as a percentage of prevailing market price. In this instance, it will be known as the yield.

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 type is the stock dividend. This payment is usually issued when a company has minimal operating cash but is still keen to keep investors happy. Each shareholder gets additional shares that are proportional to how much they own. The shares that are issued are less than 25% of previously outstanding shares. If a greater proportion than this is issued, the transaction will be described as being a stock split.

Property dividend is issued in terms of assets that are held by the company. Such assets may include equipment, inventory, vehicles, real estate properties and so on. When the bonus is paid out to the shareholders the corporation restates the fair market value of the distributed asset. In most cases this value differs from the existing book value. Consequently, the property will carry a net gain or loss.

When a company does not have enough funds to give as bonuses in the near future, the shareholders receive what is referred to as a script payment. This works more or less as a promissory note meaning that they will be paid at a later date as soon as the funds for the same are available. Another way of looking at scrip dividend is that it is equivalent to new shares created by the company.

In some cases the directors may decide to return the original capital to the shareholders. This payment is referred to as the liquidating dividend. Such may be necessary when there are plans to shut down the business.




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