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History
Further information: Financial history of the Dutch Republic and Dutch East India
Company
In financial history of the world, the Dutch East India Company (VOC) was the
first recorded (public) company ever to pay regular dividends.[5][6][7] The VOC paid
annual dividends worth around 18 percent of the value of the shares for almost 200
years of existence (16021800).[8]
Forms of payment
Cash dividends are the most common form of payment and are paid out in
currency, usually via electronic funds transfer or a printed paper check. Such
dividends are a form of investment income and are usually taxable to the recipient
in the year they are paid. This is the most common method of sharing corporate
profits with the shareholders of the company. For each share owned, a declared
amount of money is distributed. Thus, if a person owns 100 shares and the cash
dividend is 50 cents per share, the holder of the stock will be paid $50. Dividends
paid are not classified as an expense, but rather a deduction of retained earnings.
Dividends paid does not show up on an income statement but does appear on
the balance sheet.
Stock or scrip dividends are those paid out in the form of additional stock shares
of the issuing corporation, or another corporation (such as its subsidiary
corporation). They are usually issued in proportion to shares owned (for example,
for every 100 shares of stock owned, a 5% stock dividend will yield 5 extra
shares).
Nothing tangible will be gained if the stock is split because the total number of
shares increases, lowering the price of each share, without changing the market
capitalization, or total value, of the shares held. (See also Stock dilution.)
Stock dividend distributions are issues of new shares made to limited partners by
a partnership in the form of additional shares. Nothing is split, these shares
increase the market capitalization and total value of the company at the same time
reducing the original cost basis per share.
Stock dividends are not includable in the gross income of the shareholder for US
income tax purposes. Because the shares are issued for proceeds equal to the pre-
existing market price of the shares; there is no negative dilution in the amount
recoverable.
Property dividends or dividends in specie (Latin for "in kind") are those paid out
in the form of assets from the issuing corporation or another corporation, such as a
subsidiary corporation. They are relatively rare and most frequently are securities
of other companies owned by the issuer, however they can take other forms, such
as products and services.
Other dividends can be used in structured finance. Financial assets with a known
market value can be distributed as dividends; warrants are sometimes distributed in
this way. For large companies with subsidiaries, dividends can take the form of
shares in a subsidiary company. A common technique for "spinning off" a
company from its parent is to distribute shares in the new company to the old
company's shareholders. The new shares can then be traded independently.
Reliability of dividends
Two metrics are commonly used to examine a firm's dividend policy.
Payout ratio is calculated by dividing the company's dividend by the earnings per
share. A payout ratio greater than 1 means the company is paying out more in
dividends for the year than it earned.
Dividend cover is calculated by dividing the company's cash flow from
operations by the dividend. This ratio is apparently popular with analysts
of income trusts in Canada.[citation needed] Dividends are payments made by a
corporation to its shareholder members. It is the portion of corporate profits paid
out to stockholders.
Dividend dates
A dividend that is declared must be approved by a company's board of
directors before it is paid. For public companies, four dates are relevant regarding
dividends:[12]
Declaration date the day the board of directors announces its intention to pay a
dividend. On that day, a liability is created and the company records that liability
on its books; it now owes the money to the stockholders.
In-dividend date the last day, which is one trading day before the ex-dividend
date, where the stock is said to be cum dividend ('with [including] dividend'). In
other words, existing holders of the stock and anyone who buys it on this day will
receive the dividend, whereas any holders selling the stock lose their right to the
dividend. After this date the stock becomes ex dividend.
Ex-dividend date the day on which shares bought and sold no longer come
attached with the right to be paid the most recently declared dividend. In the
United States, it is typically 2 trading days before the record date. This is an
important date for any company that has many stockholders, including those that
trade on exchanges, to enable reconciliation of who is entitled to be paid the
dividend. Existing holders of the stock will receive the dividend even if they sell
the stock on or after that date, whereas anyone who bought the stock will not
receive the dividend. It is relatively common for a stock's price to decrease on the
ex-dividend date by an amount roughly equal to the dividend paid. This reflects the
decrease in the company's assets resulting from the declaration of the dividend.
Book closure date when a company announces a dividend, it will also announce
a date on which the company will ideally temporarily close its books for fresh
transfers of stock, which is also usually the record date.
Record date shareholders registered in the company's record as of the record
date will be paid 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.
Payment date the day on which the dividend cheque will actually be mailed to
shareholders or credited to their bank account.
Dividend-reinvestment
Some companies have dividend reinvestment plans, or DRIPs, not to be confused
with scrips. DRIPs 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.
Dividend taxation
Main article: Dividend tax
Types:
1. Cash Dividend: It is one of the most common types of dividend paid in cash. The
shareholders announce the amount to be disbursed among the shareholder on the
date of declaration. Then on the date of record, the amount is assigned to the
shareholders and finally, the payments are made on the date of payment. The
companies should have an adequate retained earnings and enough cash balance to
pay the shareholders in cash.
2. Scrip Dividend: Under this form, a company issues the transferable promissory
note to the shareholders, wherein it confirms the payment of dividend on the future
date.A scrip dividend has shorter maturity periods and may or may not bear any
interest. These types of dividend are issued when a company does not have enough
liquidity and require some time to convert its current assets into cash.
3. Bond Dividend: The Bond Dividends are similar to the scrip dividends, but the
only difference is that they carry longer maturity period and bears interest.
4. Stock Dividend/ Bonus Shares: These types of dividend are issued when a
company lacks operating cash, but still issues, the common stock to the
shareholders to keep them happy.The shareholders get the additional shares in
proportion to the shares already held by them and dont have to pay extra for these
bonus shares. Despite an increase in the number of outstanding shares of the firm,
the issue of bonus shares has a favorable psychological effect on the investors.
5. Property Dividend: These dividends are paid in the form of a property rather than
in cash. In case, a company lacks the operating cash; then non-monetary dividends
are paid to the investors.The property dividends can be in any form: inventory,
asset, vehicle, real estate, etc. The companies record the property given as a
dividend at a fair market value, as it may vary from the book value and then record
the difference as a gain or loss.
6. Liquidating Dividend: When the board of directors decides to pay back the
original capital contributed by the equity shareholders as dividends, is called as a
liquidating dividend. These are usually paid at the time of winding up of the
operations of the firm or at the time of final closure.
Thus, it is found out that usually the dividends are paid in cash, but however in
certain situations, there could be the other forms of dividend as explained above.
On June 1, ABC pays the dividends, and records the transaction with this entry:
Debit Credit
Cash 1,000,000
Debit Credit
Debit Credit
Debit Credit
On the dividend payment date, ABC records the following entry to record the
payment transaction:
Debit Credit
Debit Credit
The date of payment is one year later, so that ABC has accrued $25,000 in
interest expense on the notes payable. On the payment date (assuming no prior
accrual of the interest expense), ABC records the payment transaction with this
entry:
Debit Credit
Cash 275,000
On the dividend payment date, ABC records the following entry to record the
payment transaction:
Debit Credit
Cash 1,600,000
The part of the annual profit of a company distributed among its shareholders is
called dividend. The dividend is always reckoned on the face value of a share
irrespective of its MV.
100
100
Formula
NOTE: The face value of a share remains the same. The market value of a share
changes from time to time.
Shares
Types of Shares
The capital of the company can be divided into different units with definite value
called shares. Holders of these shares are called shareholders or members of the
company. There are two types of shares which a company may issue (1) Preference
Shares (2) Equality Shares.
(1) Preferences Shares
Shares which enjoy the preferential rights as to dividend and repayment of capital
in the event of winding up of the company over the equity shares are called
preference shares. The holder of preference shares will get a fixed rate of dividend.
Capital raised by issuing shares, is not to be repaid to the shareholders (except buy
back of shares in certain conditions) but capital raised through the issue of
redeemable preference shares is to be paid back by the raised thought the issue of
redeemable preference shares is to be paid back to the company to such
shareholders after the expiry of a stipulated period, whether the company is wound
up or not. As per section (80) 5a, a company after the commencement of the
Companies (Amendment) Act, 1988 cannot issue any preference shares which are
irredeemable or redeemable after the expiry of a period of 10 years from the date
of its issue. It means a company can issue redeemable preference share which are
redeemable within 10 years from the date of their issue.
The preference shares which are entitled to a share in the surplus profit of the
company in addition to the fixed rate of preference dividend are known as
participating preference shares. After the payment of the dividend a part of surplus
is distributed as dividend among the quality shareholders at a particulate rate. The
balance may be shared both by equity shareholders at a particular rate. The balance
may be shared both by equity and participating preference shares. Thus
participating preference shareholders obtain return on their capital in two forms (i)
fixed dividend (ii) share in excess of profits. Those preference shares which do not
carry the right of share in excess profits are known as non-participating preference
shares.
Equity shares will get dividend and repayment of capital after meeting the claims
of preference shareholders. There will be no fixed rate of dividend to be paid to the
equity shareholders and this rate may vary form year to year. This rate of dividend
is determined by directors and in case of larger profits, it may even be more than
the rate attached to preference shares. Such shareholders may go without any
dividend if no profit is made.
Certain business organizations need to raise money from public. In India, such an
organization needs to be registered under the Indian Companies Act. Such an
organization is called a public limited company.
A company may need money to start business or to start a new project. The sum of
money required is called capital. The required capital is divided into small equal
parts, and each part is called share. The company prepares a detailed plan of the
proposed project and frames rules and regulations regarding its functioning. They,
then, draft a proposal, issue a prospectus, explaining the plan of the project and
invite the public to invest money in their project. They, thus, pool up the required
funds from the public, by assigning them shares of the company. The value of a
share may be Re 1, Rs 10, Rs 100, Rs 1000, etc. The capital is raised by selling
these shares. A person who purchases shares of the company becomes a
shareholder of the company.
Value of shares
The original value of a share printed in the certificate of the share is called its face
value or nominal value (in short, NV). The NV of a share is also known as
register value, printed value and par value. The price at which the share is sold or
purchased in the capital market through stock exchanges is called its market value
(in short, MV).
At premium or Above par, if its market value is more than its face value.
At par, if its market value equals its face value.
At discount or Below par, if its market value is less than its face value.
The share of a company that is doing well or expected to do well is sold in the
market at a price higher than its NV. In such a situation, we say the share is at
premium or above par. For example, if a share of NV of Rs 10 is selling at Rs 16
then the share is at a premium of Rs 6. The share of a company that is neither
doing well nor poorly is sold in the market at a price equal to its NV. For example,
if a share of NV of Rs 100 is selling at Rs 100 then the share is at par. The share of
a company that is doing poorly or may do poorly in the future is sold in the market
at a price lower than its NV. In such a case, we say the share is at a discount or
below par. For example, if a share of NV of Rs 100 is selling at Rs 80 then the
share is at a discount of Rs 20.