A dividend is a payment made by a corporation to its shareholders, typically in the form of cash or additional shares of stock. Dividends are distributed from the company’s earnings or profits and are usually declared and approved by the company’s board of directors. They represent a portion of the company’s profits distributed to shareholders as a return on their investment.
Key points about dividends include:
Types of Dividends
Cash Dividend: The most common type of dividend, where shareholders receive a cash payment per share owned.
Stock Dividend: Instead of cash, shareholders receive additional shares of stock, usually issued at a predetermined ratio.
Property Dividend: In some cases, companies may distribute assets other than cash or stock, such as physical property or securities, as dividends.
Declaration and Payment: Dividends are declared by the company’s board of directors and are typically paid regularly, such as quarterly or annually. The declaration date is when the board announces the dividend, the ex-dividend date is the date the stock trades without the dividend, and the payment date is when the dividend is distributed to shareholders.
Impact on Shareholders: Dividends provide shareholders with a direct return on their investment in the company. They can be an important source of income for investors, particularly those seeking regular income from their investments, such as retirees. Dividends can signal financial strength and stability as companies that consistently pay dividends are favoured by investors.
Tax Treatment: The tax treatment of dividends varies depending on factors such as the shareholder’s tax status and the type of dividend received. In many jurisdictions, qualified dividends are taxed at a lower rate than ordinary income, while non-qualified dividends are taxed at the shareholder’s ordinary income tax rate.
Dividend Policy: Companies may have different dividend policies based on their financial condition, growth prospects, capital requirements, and shareholder preferences. Some companies may prioritise paying dividends to shareholders, while others may reinvest profits into the business for growth opportunities.