Dividend and Dividend Policy Meaning, Types

[Meaning of Dividend, Types of Dividends, Dividend Policy Meaning, Types of Dividend Policy, Regular, Stable, Irregular and No Dividend Policy]

Meaning of Dividend

Meaning of Dividend: A dividend is that portion of profits and surplus funds of a company which has actually set aside by a valid act of the company for distribution among its shareholders.

According to ICAI, “Dividend is the distribution to the shareholders of a company from the reserves and profits.”

In the words of S.M. Shah, “Dividend is a part of divisible profits of a business company which is distributed to the shareholders.”

Dividend may be divided into following categories:

1.       Cash Dividend.

2.       Stock Dividend or Bonus Dividend.

3.       Bond Dividend.

4.       Property Dividend.

5.       Composite Dividend.

6.       Interim Dividend.

7.       Special or Extra Dividend.

8.       Optional Dividend.

Some of these are explained below:

1. CASH DIVIDEND

A Cash dividend is the most common form of the dividend. The shareholders are paid in cash per share. The board of directors announces the dividend payment on the date of declaration. The dividends are assigned to the shareholders on the date of record. The dividends are issued on the date of payment. But for distributing cash dividend, the company needs to have positive retained earnings and enough cash for the payment of dividends.

2. BONUS SHARE

Bonus share is also called as the stock dividend. Bonus shares are issued by the company when they have low operating cash, but still want to keep the investors happy. Each equity shareholder receives a certain number of additional shares depending on the number of shares originally owned by the shareholder. For example, if a person possesses 10 shares of Company A, and the company declares bonus share issue of 1 for every 2 shares, the person will get 5 additional shares in his account. From company’s angle, the no. of shares and issued capital in the company will increase by 50% (1/2 shares). The market price, EPS, DPS etc. will be adjusted accordingly.

3. INTERIM DIVIDEND: 

This dividend is issued between two accounting year on the basis of expected profit. This dividend is declared before the preparation of final accounts.

4. PROPERTY DIVIDEND

The company makes the payment in the form of assets in the property dividend. The asset could be any of this equipment, inventory, vehicle or any other asset. The value of the asset has to be restated at the fair value while issuing a property dividend.

5. SCRIP DIVIDEND

Scrip dividend is a promissory note to pay the shareholders later. This type of dividend is used when the company does not have sufficient funds for the issuance of dividends.

6. LIQUIDATING DIVIDEND

When the company returns the original capital contributed by the equity shareholders as a dividend, it is termed as liquidating dividend. It is often seen as a sign of closing down the company.

Dividend Policy Meaning

A policy which determines the amount of earnings to be distributed to the shareholders and the amount to be retained in the company as retained earnings, is called dividend policy. In short, dividend policy determines the division of earnings between payment to shareholders and retained earnings.

Types of Dividend Policy

Every company which is listed and is making profits has to take the decision regarding the distribution of profits to its shareholders as they are the ones who have invested their money into the company. This distribution of profits by the company to its shareholders is called dividend in finance parlance, every company has different objectives and methods and dividend is no different and that is the reason why different companies follow different dividend policies, let’s look at various types of dividend policies:

1) Regular dividend policy: 

Under this type of dividend policy a company has the policy of paying dividends to its shareholders every year. When the company makes abnormal profits then the company will not pay that extra profits to its shareholders completely rather it will distribute lower profit in the form of the dividend to the shareholders and keep the excess profits with it and suppose a company makes loss then also it will pay dividend to its shareholders under regular dividend policy. This type of dividend policy is suitable for those companies which have constant cash flows and have stable earnings. Investors like retired person and conservative investors who prefer safe investment and constant income will invest in constant dividend paying companies.

2) Stable Dividend Policy: 

Stability of dividends means regularity in payment of dividends. It refers to the consistency in stream of dividends. In short, we can say that a stable dividend policy is a long term policy which is not affected by the variations in the earnings during different periods. The stability of dividends can take any one of the three forms:

a)      Constant D/P ratio.

b)      Constant dividends per share.

c)       Constant dividend per share plus extra dividends.

Merits of Stable Dividend Policy: 

Following are some of the advantages of a stable dividend policy:

a)      This policy contributes to stablise market value of company’s equity shares at a high level.

b)      This policy helps the company is mobilizing additional funds in the form of additional equity shares.

c)       Regular earnings in the form of dividend satisfy investors.

d)      This policy encourages shareholders to hold company’s share for longer time and simultaneously other investors are also attracted for the purchase of shares.

e)      This policy is helpful for expansion and growth prospects of a company.

f)       This policy encourages the institutional investors because they like to invest in those companies which make uninterrupted payment of dividends.

Demerits of Stable Dividend Policy: 

Following are some of the disadvantages of a stable dividend policy:

a)      Sometime despite of large earnings, management decides not to declare dividends.

b)      In this policy, instead of paying dividend in cash, bonus share are issued to the shareholders.

c)       This policy is used to capitalise reinvested earnings of the firm.

3) Irregular dividend policy: 

Under this type of policy there is no mandate to give dividends to shareholders of the company and top management gives it according to its own free will, so suppose company has some abnormal profits then management may decide to pass it fully to its shareholders by giving interim dividend or management may decide to use it for future business expansion. Companies which have irregular earnings, lack of liquidity and are afraid of committing itself for paying regular dividends adopt irregular dividend policy.

4) No dividend policy: 

Under this policy company pays no dividend to its shareholders, the reason for following this type of policy is that company retains the profit and invests in the growth of the business. Companies which have ample growth opportunities follow this type of policy and shareholders who are looking for growth invest in these types of companies because there is plenty of scope of capital appreciation in these stocks and if the company is successful then capital appreciation will outdo regular dividend income as far as shareholders are concerned.  

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