Dividend may be defined as a sum of money given by a company to its shareholders, and it is usually only a part of company’s profits. The word comes from Latin language (dividendum – thing to be divided). A company can freely use its own profit money, and it can either choose to invest it into further developing or expanding the business (which is then called retained earnings), or it can repay some own the shareholders money back to them. Part of the profits put aside for repaying the money to the shareholders is called dividends.
Dividends can be paid fully in a way of one-time payment in cash or deposited on a bank account, but the most common way of paying dividends is via dividend reinvestment plan. Dividend reinvestment plan is a payment option for companies to shareholders via issuing of further company shares or share purchase. Not all investors receive the same amount of money for dividends. Every investor receives that greater amount of money as much as he has shares, where every share receives the same amount of money. This is referred to as Dividends per share.
Forms of payment
- Cash payments are the most common way of paying dividends. It can be handled electronically – paying on shareholders bank account or it can be in a form of a printed check. Dividends paid in this way are not considered as expenses but rather as a part of retained earnings. This payment is taxable to the recipient in the year it is received.
- Stock or script dividends are those dividends which are paid in additional shares of the same company, or rather in some subsidiary company. This way the company increases the total number of shares and thus lovers the value of each share.
- Stock dividend distributions are new shares given to selected partners via additional shares.
- Property dividends are dividends payed in form of company assets, or more often subsidiary company assets. They can also be in form of products or sevices. Property dividends are rare.
- Interim dividends are made before Annnual General Meeting. They are usualy made with interim financial statements.
- Other dividends can be used in structured financing. This is one way of spinning off a company from its parent company, by reasigning shares as dividends to father company and then using new shares indipendently.
Reliability of dividends is calculated via dividend payout ratio and dividend cover.