What is a dividend?

A dividend is a payment made by a business to its shareholders. It is usually a distribution of profits. When a business earns a profit or surplus, it can reinvest this money in the business, and pay a fraction of this reinvestment as a dividend to its shareholders. The distribution to shareholders can be in cash or a dividend reinvestment plan, paid by the issue of further shares or repurchasing shares.

How is a dividend calculated?

A dividend is allocated as a fixed amount per share. Shareholders will receive a percentage on the total worth of their shares. Retained earnings are shown in the shareholder’s equity section of the balance sheet, in the same manner as issued share capital.

Public companies generally pay dividends on a fixed schedule but many declare a dividend at any time. This can be referred to as a special dividend to identify it from the fixed schedule dividends.

Cooperatives usually allocate dividends according to members’ activity, so their dividends are often considered to be a pre-tax expense.

Forms of payment

Cash dividends.

These are the most common form of payment. It is paid out in physical currency. Most of the businesses use electronic funds transfer (EFT) or a printed paper check. These dividends are a form of investment income. They are usually taxable to the recipient in the year they are issued.

Stock dividends.

These are paid out in the form of additional stock shares of the issuing company or another company. They are generally issued in proportion to the shares already owned.For example a 5% increase in 20 stocks would be a 1 share increase.

Stock dividend distributions.

New shares are issued to limited partners by a partnership in the form of additional shares. Nothing is split and these shares will increase the market capitalization and the total value of the company at the same time. This reduces the original cost basis per share.

Property dividends.

Dividends that are paid out in the form of assets from the issuing company or another company. They are quite rare. Generally, they are securities of other companies owned by the issuer but they can take other forms such as products and services.

Interim dividends.

These are divided dividends made before a company’s Annual General Meeting and financial statements. This declared dividend will usually accompany the company’s interim financial statements.

Other dividends

These can be used in structured finance. Financial assets with a known market value, can be distributed as dividends. For larger companies with subsidiaries, dividends can take the form of shares in a subsidiary company.