[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.
Also Read: Dividend Decisions Important Questions for Upcoming Exams
Q. What is Dividend and Dividend Policy? What are various types of dividend and dividend policies? 2014SN, 2015, 2016, 2017
Q. What are the factors affecting dividend decision of a firm? 2014
Q. Explain the MM theory of dividend distribution. Mention its assumptions. What are the major criticisms to this theory of irrelevance? 2012, 2013, 2015, 2016, 2018, 2021
Q. Explain the Walter’s theory of dividend distribution. Mention its assumption. What are the shortcomings tothis theory? 2017, 2019, 2022
Q. What do you mean by ploughing backof profits? Mention the purpose of creating it. What are the factors thatinfluence the ploughing back of profit? 2012, 2013, 2014, 2019, 2021
Q. Write Short notes on:
Ø Stable Dividend policy 2012, 2017
Ø Optimal Payout Ratio 2013, 2017, 2022
Ø Dividend Payout Ratio 2014
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