Different types of Dividend

The profits of a company when made available for the distribution among its shareholders are called dividend. The dividend may be as a fixed annual percentage of paid up capital as in the case of preference shares or it may vary according to the prosperity of the company as in the case of ordinary shares.
The decision for distributing or paying a dividend is taken in the meeting of Board of Directors and in confirmed generally by the annual general meeting of the shareholders. The dividend can be declared only out of divisible profits, remained after setting of all the expenses, transferring the reasonable amount of profit to reserve fund and providing for depreciation and taxation for the year. It means if in any year, there is not profits, no dividend shall be distributed that year. The shareholders cannot insist upon the company to declared the dividend. It is solely the discretion of the directors. Aunt hinted that the dividend was an income of the owners of the corporation which they received in the capacity of the owner. Distribution of dividend involves reduction of current assets (cash) but not always. Stock dividend or bonus shares is an exception to it.
Dividend may be of different types. It can be classified according to the mode of its distribution as follows

    (1) Regular Dividend. By dividend we mean regular dividend paid annually, proposed by the board of directors and approved by the shareholders in general meeting. It is also known as final dividend because it is usually paid after the finalization of accounts. It sis generally paid in cash as a percentage of paid up capital, say 10 % or 15 % of the capital. Sometimes, it is paid per share. No dividend is paid on calls in advance or calls in arrears. The company is, however, authorised to make provisions in the Articles prohibiting the payment of dividend on shares having calls in arrears.

(2) Interim Dividend. If Articles so permit, the directors may decide to pay dividend at any time between the two Annual General Meeting before finalizing the accounts. It is generally declared and paid when company has earned heavy profits or abnormal profits during the year and directors which to pay the profits to shareholders. Such payment of dividend in between the two Annual General meetings before finalizing the accounts is called Interim Dividend. No Interim Dividend can be declared or paid unless depreciation for the full year (not proportionately) has been provided for. It is, thus,, an extra dividend paid during the year requiring no need of approval of the Annual General Meeting. It is paid in cash.

(3) Stock-Dividend. Companies, not having good cash position, generally pay dividend in the form of shares by capitalizing the profits of current year and of past years. Such shares are issued instead of paying dividend in cash and called ‘Bonus Shares’. Basically there is no change in the equity of shareholders. Certain guidelines have been used by the company Law Board in respect of Bonus Shares.

(4) Scrip Dividend. Scrip dividends are used when earnings justify a dividend, but the cash position of the company is temporarily weak. So, shareholders are issued shares and debentures of other companies. Such payment of dividend is called Scrip Dividend. Shareholders generally do not like such dividend because the shares or debentures, so paid are worthless for the shareholders as directors would use only such investment is which were not . Such dividend was allowed before passing of the Companies (Amendment) Act 1960, but thereafter this unhealthy practice was stopped.

(5) Bond Dividends. In rare instances, dividends are paid in the form of debentures or bounds or notes for a long-term period. The effect of such dividend is the same as that of paying dividend in scrips. The shareholders become the secured creditors is the bonds has a lien on assets.

(6) Property Dividend. Sometimes, dividend is paid in the form of asset instead of payment of dividend in cash. The distribution of dividend is made whenever the asset is no longer required in the business such as investment or stock of finished goods.

But, it is, however, important to note that in India, distribution of dividend is permissible in the form of cash or bonus shares only. Distribution of dividend in any other form is not allowed.

You may also like...