Dividend
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- This article is about corporate dividends. For cooperative dividends, see cooperative.
Dividends are payments made by a company to its shareholders.
[edit] Overview
When a company earns a profit, some of it is reinvested in the business and called retained earnings, and some of it can be paid to its shareholders as a dividend. The frequency of these varies by country. In the United States dividends are usually declared quarterly by the board of directors. In some other countries dividends are paid biannually, as an interim dividend shortly after the company announces its interim results and a final dividend typically following its annual general meeting. In other countries, the board of directors will propose the payment of a dividend to shareholders at the annual meeting who will then vote on the proposal.
In the United States, decisions regarding the amount and frequency of dividends is solely at the discretion of the board of directors. Shareholders are explicitly forbidden from introducing shareholder resolutions involving specific amounts of dividends.[citation needed]
Where a company makes a loss during a year, it may opt to continue paying dividends from the retained earnings from previous years or to suspend the dividend. Where a company receives a one-off gain, e.g. from the sale of some assets, and has no plans to reinvest the proceeds, the money is often returned to shareholders in the form of a special dividend.
[edit] Forms of payment
[edit] Cash
Cash dividends (most common) are those paid out in form of "real cash". Such dividends are a form of investment interest/income and are taxable to the recipient in the year they are paid. This is the most common method of sharing corporate profits.
[edit] Stock
Stock or scrip dividends (common) are those paid out in form of additional stock shares of the issuing corporation, or other corporation (e.g., its subsidiary corporation). They are usually issued in proportion to shares owned (e.g., for every 100 shares of stock owned, 5% stock dividend will yield 5 extra shares). This is very similar to a stock split in that it increases the total number of shares while lowering the price of each share and does not change the market capitalization or the total value of the shares held.
[edit] Property
Property dividends or dividends in specie (Latin for "in kind") (rare) are those paid out in form of assets from the issuing corporation or another corporation, such as a subsidiary corporation. Property dividends are usually paid in the form of products or services provided by the corporation. When paying property dividends, the corporation will often use securities of other companies owned by the issuer.
[edit] Dates
Dividends must be "declared" (approved) by a company’s Board of Directors each time they are paid. There are four important dates to remember regarding dividends.
[edit] Declaration date
The declaration date is the day the Board of Director’s announces their intention to pay a dividend. On this day, the company creates a liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date.
[edit] Date of record
Shareholders who properly registered their ownership on or before the date of record will receive the dividend. Shareholders who are not registered as of this date will not receive the dividend. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date.
[edit] Ex dividend date
The "ex dividend" date is set by the exchange where the stock is traded, several days (usually two) before the date of record, so that all trades made on previous dates can be properly settled and the shareholder list on the date of record will accurately reflect the current owners. Purchasers buying before the ex-dividend date will receive the dividend. The stock is said to trade "cum dividend" (meaning "with dividend") on these dates. Purchasers buying on or after the ex-dividend date will not receive the dividend. The stock trades ex-dividend on these dates.
[edit] Payment date
The payment date is the day when the dividend cheques will actually be mailed to the shareholders of a company or credited to brokerage accounts.
[edit] Dividend-reinvestment plans
Some companies have dividend reinvestment plans, or DRIPs. These plans allow shareholders to use dividends to systematically buy small amounts of stock, usually with no commission and sometimes at a slight discount. In some cases the shareholder might not need to pay taxes on these re-invested dividends, but in most cases they do.
[edit] Shareholders like dividends because...
- Shareholders have their own personal cash needs and self-select the companies whose dividends satisfy these.
- Preferred shareholders like common share dividends because it creates a cushion that must be cut before their own dividends are.
- Shareholders feel the risk of returns from reinvested earnings at a later date, is higher than the risk of cash received today.
- Benjamin Graham and David Dodd, in the 1934 book Security Analysis, suggest that retaining earnings is, in effect, management dictating to owners how to invest their money.
[edit] Reasons companies don't pay dividends
- Management and the board may believe that the money is best re-invested into the company: research and development, capital investment, expansion, etc. Proponents suggest that a management eager to return profits to shareholders may have run out of good ideas for the future of the company.
- When dividends are paid, shareholders in many countries suffer from double taxation of those dividends: the company pays income tax to the government when it earns any income, and then when the dividend is paid, the individual shareholder pays income tax on the dividend payment. This is often used as justification for retaining earnings, or for performing a stock buyback, in which the company buys back stock, thereby increasing the value of the stock left outstanding. The shareholder will pay a tax on capital gains (which is often taxed at a lower rate than ordinary income) only when the shareholder chooses to sell the stock. If a holder of the stock chooses to not participate in the buyback, the price of the holder's shares should rise, but the tax on these gains is delayed until the actual sale of the shares. Certain types of specialized investment companies (such as a REIT in the U.S.) allow the shareholder to partially or fully avoid double taxation of dividends.
- Shareholders in companies which pay little or no cash dividends can reap the benefit of the company's profits when they sell their shareholding, or when a company is wound down and all assets liquidated and distributed amongst shareholders.
[edit] Miscellaneous specific types
[edit] Franking credits
In Australia and New Zealand, companies also forward franking credits to shareholders along with dividends. These franking credits represent the tax paid by the company upon its pre-tax profits. One dollar of company tax paid generates one franking credit. Companies can forward any proportion of franking up to a maximum amount that is calculated from the prevailing company tax rate: for each dollar of dividend paid, the maximum level of franking is the company tax rate divided by (1 - company tax rate). At the current 30% rate, this works out at 0.30 of a credit per 70 cents of dividend, or 42.857 cents per dollar of dividend. The shareholders who are able to use them offset these credits against their income tax bills at a rate of a dollar per credit, thereby effectively eliminating the double taxation of company profits. This system is called dividend imputation.
The UK's taxation system operates along similar lines: dividends come with an attached tax credit which ensures that double taxation does not take place.
[edit] Dividends from trusts
In real estate investment trusts and royalty trusts, the distributions paid often will be consistently greater than the company earnings. This can be sustainable because the accounting earnings do not recognize any increasing value of real estate holdings and resource reserves. If there is no economic increase in the value of the company's assets then the excess distribution (or dividend) will be a return of capital and the book value of the company will have shrunk by an equal amount. This may result in capital gains which may be taxed differently than dividends representing distribution of earnings.
[edit] Reliability of dividends
To determine the long run reliability of dividends, use either of two metrics that show the company's ability to pay.
[edit] Dividend Cover
Divide the company's Earnings per share by the Dividend. A Dividend Cover of less than 1 means the company is paying out more in dividends for the year than it earned.
[edit] Payout Ratio
Divide the company's Cash Flow from Operations by the Dividend. This ratio is used by analysts of Income Trusts in Canada.
[edit] Etymology and related uses
The word "dividend" ultimately comes from the Latin word "dividendum" meaning "the thing which is to be divided".[1]
In the United States, credit unions generally use the term "dividends" to refer to interest payments they make to depositors. These are not dividends in the normal sense and are not taxed as such; they are just interest payments. Credit unions call them dividends since, as credit unions are owned by their members, interest payments are effectively payments to owners.
Consumer co-operative societies use the term "dividend" for profit-sharing payments to their members. Unlike joint stock company dividends, these payments are made in proportion to a members' spending with the co-operative society, not the number of shares they hold in it.
[edit] Footnotes
[edit] See also
- Dividend tax
- Dividend units
- Dividend yield
- Dividend reinvestment program
- Stock buyback
- Division (mathematics)
- Quotient
- Special dividend
- P/E ratio
[edit] External links
- All About Dividends includes educational information on dividend policies, payout ratios, types of dividends including property, stock, and cash, and enrolling in dividend reinvestment programs
- Dividend Policy from studyfinance.com at the University of Arizona
