Types of Dividends
Dividends are a way for companies to distribute profits to shareholders. The type of dividend a company chooses to distribute depends on its financial health, growth strategy, and cash flow management. Below is a detailed breakdown of the various types of dividends:
1. Cash Dividends
Definition:
A cash dividend is the most common form of dividend where a company pays its shareholders a portion of its profits in cash.
Key Features:
- Declared by the Board of Directors and paid per share.
- Paid at regular intervals (quarterly, semi-annually, or annually).
- The company must have enough retained earnings and cash reserves.
- It affects the company’s cash flow and reduces retained earnings.
Process of Cash Dividend Payment:
- Declaration Date – The Board of Directors announces the dividend and its payment date.
- Ex-Dividend Date – The cut-off date when new buyers of stock are not entitled to the upcoming dividend.
- Record Date – The company identifies shareholders eligible for dividends.
- Payment Date – The actual date when the dividend is distributed to shareholders.
Example:
A company declares a $2 per share dividend. If an investor owns 500 shares, they receive $1,000 (500 × $2) in cash.
2. Stock Dividends
Definition:
Instead of paying cash, a company issues additional shares to its shareholders as a dividend.
Key Features:
- No cash outflow, allowing the company to conserve its resources.
- Increases the number of outstanding shares but does not increase total shareholder value immediately.
- Commonly used when a company wants to reward shareholders but retain profits for expansion.
- The percentage of ownership remains unchanged.
Types of Stock Dividends:
- Small Stock Dividend (Less than 20-25% of existing shares) – Based on market value.
- Large Stock Dividend (More than 20-25% of existing shares) – Based on par value.
Example:
A company announces a 10% stock dividend. If a shareholder owns 100 shares, they receive 10 additional shares (100 × 10%).
3. Property Dividends (Non-Cash Dividends)
Definition:
A company distributes physical assets instead of cash or stock.
Key Features:
- Can include real estate, equipment, or even inventory.
- The value of the property dividend is recorded at fair market value.
- Used when a company wants to reward shareholders without reducing cash reserves.
Example:
A company distributes gold bullion worth $1,000 per shareholder instead of cash.
4. Scrip Dividends (Promissory Notes)
Definition:
A company issues a promissory note to pay dividends at a later date instead of immediate cash.
Key Features:
- Used when a company lacks immediate cash but expects future earnings.
- Essentially an IOU to shareholders.
- May or may not include interest.
- Common in cash-constrained situations.
Example:
A company announces a $5 per share dividend but will pay in six months instead of immediately.
5. Liquidating Dividends
Definition:
Paid when a company is shutting down and returning capital to investors.
Key Features:
- Not considered a regular dividend.
- Taken from paid-in capital rather than retained earnings.
- Indicates that the company no longer needs capital for future expansion.
Example:
A company is closing down and returns $50 per share to its shareholders from liquidation proceeds.
6. Preferred Dividends
Definition:
Dividends that are guaranteed to preferred shareholders before any common shareholders are paid.
Key Features:
- Fixed dividend payments at a predetermined rate.
- Paid before common shareholders in case of financial difficulty.
- Some preferred shares have a cumulative feature, meaning missed payments accumulate.
Example:
A preferred stock has a 6% dividend rate on a $100 par value. Each preferred shareholder receives $6 per share annually regardless of company profits.
7. Special Dividends
Definition:
A one-time dividend issued due to extraordinary profits, asset sales, or tax benefits.
Key Features:
- Not regular and may not occur again.
- Used to distribute excess cash or celebrate financial milestones.
Example:
A tech company sells a division and distributes $10 per share as a special dividend.
8. Dividend Reinvestment Plan (DRIP)
Definition:
Instead of receiving cash, shareholders can reinvest dividends to buy more company shares automatically.
Key Features:
- Encourages compounding growth.
- Allows shareholders to accumulate more shares without extra fees.
- Common among long-term investors.
Comparison Table of Dividend Types
| Type of Dividend | Form of Payment | Effect on Shareholders | Effect on Company |
|---|---|---|---|
| Cash Dividend | Paid in cash | Immediate income | Reduces cash reserves |
| Stock Dividend | Additional shares | No cash received, but more shares owned | No immediate cash impact, but increases shares outstanding |
| Property Dividend | Physical assets | Receives assets instead of cash | Reduces assets, no cash impact |
| Scrip Dividend | Promissory note | Delayed cash payment | Liability increases until payment is made |
| Liquidating Dividend | Cash or assets | Return of capital, not earnings | Reduces company assets |
| Preferred Dividend | Fixed cash payment | Guaranteed income for preferred shareholders | Must be paid before common stockholders |
| Special Dividend | One-time cash payout | Extra income for shareholders | Reduces cash or retained earnings |
| DRIP (Dividend Reinvestment Plan) | Additional shares | Increases shareholding automatically | No cash payout, but stock dilution |