Dividend refers to a payment, which a company pays to its shareholders. Payment of dividends is not considered as an expense for a company, rather it is regarded as distribution of assets among the shareholders.
When a company earns profit, it has two options for implementing that profit. They are the following:
Re-investment of the profit into business operations, which is also known as retained earnings
Paying dividends to the shareholders of the company
A large number of companies keep aside a part of the profits earned by them and the remaining portion is distributed as dividends. Normally, the payment of dividends of public companies is made on the basis of a specified schedule; nevertheless, they have the discretion to declare a dividend at any point of time, in some instances that is referred to as special dividend.
Commonly, dividends are distributed in cash form. However, dividends are also distributed in the form of stocks and shares.
In the U.S., the public companies normally declare dividends on a quarterly basis according to the decision taken by the board of directors. For other countries, dividend is declared on a yearly or half-yearly basis in the form of a final dividend or an interim dividend.
If a company has suffered a loss, it still has the option to pay dividend out of retained earnings earned during earlier years or cancel the dividend.
Dividends can be paid in multiple forms, which include the following:
- Cash dividend
- Property dividend
- Stock dividend
- Other forms
It is necessary that a dividend has to be declared by the board of directors of a company. The different dates that are associated with the declaration of dividends are the following:
- Ex-dividend date
- Declaration date
- Record date
- Payment date
Some companies implement the dividend re-investment plans (DRIPs) for utilizing the cash dividend to buy bonus shares or stocks for the shareholders.
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