Dividends are the distribution of a company’s earnings to its shareholders. They can be classified into different types based on the method and frequency of distribution. The following are the types of dividends:
- Cash Dividend: This is the most common type of dividend, in which a company distributes its earnings to shareholders in the form of cash. The cash dividend is usually paid out quarterly, semi-annually, or annually. The amount of the dividend is determined by the company’s board of directors, who consider the company’s financial performance, growth prospects, and other factors.
- Stock Dividend: This type of dividend is paid in the form of additional shares of stock. Stock dividends are usually issued when a company wants to conserve cash and retain earnings for growth opportunities. For example, if a company declares a 10% stock dividend, a shareholder who owns 100 shares of the company will receive 10 additional shares.
- Property Dividend: This type of dividend is paid in the form of assets other than cash or stock. Property dividends can include anything from raw materials and inventory to real estate and equipment. Property dividends are rare, but they can be used to distribute assets that are no longer needed or to raise funds for a specific purpose.
- Scrip Dividend: This type of dividend is paid in the form of a promissory note or a bond that can be converted into cash or stock at a later date. Scrip dividends are usually used by companies that want to conserve cash and provide shareholders with a future income stream.
- Liquidating Dividend: This type of dividend is paid when a company is liquidated or goes out of business. Liquidating dividends are paid after all debts and liabilities have been settled, and the remaining assets are distributed among the shareholders.
Each type of dividend has its advantages and disadvantages. For example, cash dividends provide immediate income to shareholders, but they can limit a company’s ability to reinvest earnings for growth. Stock dividends can increase the number of shares outstanding, diluting the value of existing shares, but they can also increase shareholder wealth by increasing the value of the company. Property dividends and scrip dividends are less common, but they can provide shareholders with additional assets or income streams. Liquidating dividends are paid only in the event of a company’s liquidation or bankruptcy and are a last resort for shareholders.
Determinants of Dividend policy
Determining the dividend policy is a crucial decision for a company’s management team. There are several factors to be considered before deciding the dividend policy. The determinants of dividend policy are as follows:
- Earnings: Earnings are the primary determinant of a company’s dividend policy. The company’s management has to decide how much of the earnings to distribute as dividends and how much to retain for future investments. If the company has a steady flow of earnings, it can afford to pay higher dividends to its shareholders.
- Liquidity: Liquidity is another important determinant of a company’s dividend policy. A company needs to maintain sufficient cash reserves to meet its operational expenses, capital expenditures, and debt servicing requirements. If the company distributes a substantial portion of its earnings as dividends, it may face liquidity issues. Thus, the company must balance its cash requirements with the dividend payouts.
- Stability of earnings: The stability of earnings is an essential factor in determining the dividend policy. Companies with stable earnings can afford to pay higher dividends than companies with volatile earnings. Companies in cyclical industries are more likely to have volatile earnings, and therefore, they may not be able to pay high dividends consistently.
- Growth prospects: Companies that are in the growth phase may choose to retain earnings to fund future investments. Retained earnings can be reinvested in the company’s operations, which can generate higher returns for shareholders in the long run. Companies that are mature and have limited growth prospects may choose to distribute higher dividends to attract investors.
- Tax considerations: Tax implications also play a role in determining the dividend policy. Dividends are taxed differently from capital gains. In some countries, dividends are taxed at a higher rate than capital gains. Companies may consider the tax implications of dividend payouts when deciding the dividend policy.
- Legal constraints: The company’s legal structure and regulatory environment may also impact the dividend policy. For example, some countries have legal restrictions on the amount of dividends that can be paid out to shareholders. Similarly, regulatory bodies may require companies to maintain a certain level of reserves before distributing dividends.
- Shareholder preferences: The preferences of the company’s shareholders can also influence the dividend policy. Some investors prefer high dividends, while others may prefer the company to reinvest its earnings for future growth. Companies may need to consider the preferences of their shareholders while deciding the dividend policy.
- Access to capital markets: The company’s access to capital markets can also influence the dividend policy. Companies that have easy access to capital markets can raise funds through debt or equity issuances and may not need to pay high dividends. In contrast, companies with limited access to capital markets may need to pay higher dividends to attract investors.