A dividend is a payment made by a corporation to its shareholders,
usually as a distribution of profits. When a corporation earns a
profit or surplus, the corporation is able to re-invest the profit in
the business (called retained earnings) and pay a proportion of the
profit as a dividend to shareholders. Distribution to shareholders may
be in cash (usually a deposit into a bank account) or, if the
corporation has a dividend reinvestment plan, the amount can be paid
by the issue of further shares or share repurchase.
A dividend is allocated as a fixed amount per share, with shareholders
receiving a dividend in proportion to their shareholding. For the
joint-stock company, paying dividends is not an expense; rather, it is
the division of after-tax profits among shareholders. Retained
earnings (profits that have not been distributed as dividends) are
shown in the shareholders' equity section on the company's balance
sheet – the same as its issued share capital. Public companies
usually pay dividends on a fixed schedule, but may declare a dividend
at any time, sometimes called a special dividend to distinguish it
from the fixed schedule dividends. Cooperatives, on the other hand,
allocate dividends according to members' activity, so their dividends
are often considered to be a pre-tax expense.
The word "dividend" comes from the Latin word "dividendum" ("thing to
2 Forms of payment
3 Reliability of dividends
6.1 United States and Canada
6.2 Australia and New Zealand
6.3 United Kingdom
7 Effect on stock price
8 Other corporate entities
9 See also
11 External links
Financial history of the Dutch Republic
Financial history of the Dutch Republic and Dutch
East India Company
In financial history of the world, the
Dutch East India Company
Dutch East India Company (VOC)
was the first recorded (public) company ever to pay regular
dividends. The VOC paid annual dividends worth around 18
percent of the value of the shares for almost 200 years of existence
Forms of payment
Cash dividends are the most common form of payment and are paid out in
currency, usually via electronic funds transfer or a printed paper
check. Such dividends are a form of investment income and are usually
taxable to the recipient in the year they are paid. This is the most
common method of sharing corporate profits with the shareholders of
the company. For each share owned, a declared amount of money is
distributed. Thus, if a person owns 100 shares and the cash dividend
is 50 cents per share, the holder of the stock will be paid $50.
Dividends paid are not classified as an expense, but rather a
deduction of retained earnings. Dividends paid does not show up on an
income statement but does appear on the balance sheet.
Stock or scrip dividends are those paid out in the form of additional
stock shares of the issuing corporation, or another corporation (such
as its subsidiary corporation). They are usually issued in proportion
to shares owned (for example, for every 100 shares of stock owned, a
5% stock dividend will yield 5 extra shares).
Nothing tangible will be gained if the stock is split because the
total number of shares increases, lowering the price of each share,
without changing the market capitalization, or total value, of the
shares held. (See also
Stock dividend distributions
Stock dividends do not affect the market
capitalization of a company  
Stock dividends are not
includable in the gross income of the shareholder for US income tax
purposes. Because the shares are issued for proceeds equal to the
pre-existing market price of the shares; there is no negative dilution
in the amount recoverable.
Property dividends or dividends in specie (Latin for "in kind") are
those paid out in the form of assets from the issuing corporation or
another corporation, such as a subsidiary corporation. They are
relatively rare and most frequently are securities of other companies
owned by the issuer, however they can take other forms, such as
products and services.
Interim dividends are dividend payments made before a company's Annual
General Meeting (AGM) and final financial statements. This declared
dividend usually accompanies the company's interim financial
Other dividends can be used in structured finance. Financial assets
with a known market value can be distributed as dividends; warrants
are sometimes distributed in this way. For large companies with
subsidiaries, dividends can take the form of shares in a subsidiary
company. A common technique for "spinning off" a company from its
parent is to distribute shares in the new company to the old company's
shareholders. The new shares can then be traded independently.
Reliability of dividends
Two metrics are commonly used to examine a firm's dividend policy.
Payout ratio is calculated by dividing the company's dividend by the
earnings per share. A payout ratio greater than 1 means the company is
paying out more in dividends for the year than it earned.
Dividend cover is calculated by dividing the company's cash flow from
operations by the dividend. This ratio is apparently popular with
analysts of income trusts in Canada. Dividends are
payments made by a corporation to its shareholder members. It is the
portion of corporate profits paid out to stockholders.
A dividend that is declared must be approved by a company's board of
directors before it is paid. For public companies, four dates are
relevant regarding dividends:
Declaration date — the day the board of directors announces its
intention to pay a dividend. On that day, a liability is created and
the company records that liability on its books; it now owes the money
to the stockholders.
In-dividend date — the last day, which is one trading day before the
ex-dividend date, where the stock is said to be cum dividend ('with
[including] dividend'). In other words, existing holders of the stock
and anyone who buys it on this day will receive the dividend, whereas
any holders selling the stock lose their right to the dividend. After
this date the stock becomes ex dividend.
Ex-dividend date — the day on which shares bought and sold no longer
come attached with the right to be paid the most recently declared
dividend. In the United States, it is typically 2 trading days before
the record date. This is an important date for any company that has
many stockholders, including those that trade on exchanges, to enable
reconciliation of who is entitled to be paid the dividend. Existing
holders of the stock will receive the dividend even if they sell the
stock on or after that date, whereas anyone who bought the stock will
not receive the dividend. It is relatively common for a stock's price
to decrease on the ex-dividend date by an amount roughly equal to the
dividend paid. This reflects the decrease in the company's assets
resulting from the declaration of the dividend.
Book closure date —when a company announces a dividend, it will also
announce a date on which the company will ideally temporarily close
its books for fresh transfers of stock, which is also usually the
Record date — shareholders registered in the company's record as of
the record date will be paid the dividend. Shareholders who are not
registered as of this date will not receive the dividend. Registration
in most countries is essentially automatic for shares purchased before
the ex-dividend date.
Payment date — the day on which the dividend cheque will actually be
mailed to shareholders or credited to their bank account.
Some companies have dividend reinvestment plans, or DRIPs, not to be
confused with scrips. DRIPs allow shareholders to use dividends to
systematically buy small amounts of stock, usually with no commission
and sometimes at a slight discount. In some cases, the shareholder
might not need to pay taxes on these re-invested dividends, but in
most cases they do.
Most countries impose a corporate tax on the profits made by a
company. A dividend paid by a company is not an expense of the
company, but is income of the shareholder. The tax treatment of this
dividend income varies considerably between countries:
United States and Canada
The United States and Canada impose a lower tax rate on dividend
income than ordinary income, on the assertion that company profits had
already been taxed as corporate tax.
Australia and New Zealand
Australia and New Zealand have a dividend imputation system, wherein
companies can attach franking credits or imputation credits to
dividends. These franking credits represent the tax paid by the
company upon its pre-tax profits. One dollar of company tax paid
generates one franking credit. Companies can attach any proportion of
franking up to a maximum amount that is calculated from the prevailing
company tax rate: for each dollar of dividend paid, the maximum level
of franking is the company tax rate divided by (1 - company tax rate).
At the current 30% rate, this works out at 0.30 of a credit per 70
cents of dividend, or 42.857 cents per dollar of dividend. The
shareholders who are able to use them, apply these credits against
their income tax bills at a rate of a dollar per credit, thereby
effectively eliminating the double taxation of company profits.
Dividends from UK companies are paid out of profits after corporation
Corporation tax is at 20% but decreases to 19% from 1 April 2017
- split periods have pro-rata applied).
Dividend income is taxable on
UK residents at the rate of 7.5% for basic rate payers, 32.5% for
higher rate tax payers and 38.1% for additional rate payers. The
income tax on dividend receipts is collected via personal tax returns.
The first £5,000 of dividend income is not taxed, however dividend
income above that amount is subject to the rate that would have
applied if the £5,000 exemption had not been given. UK limited
companies do not pay tax on dividends received from their investments
or from their subsidiaries. This is classed as "franked investment
In India, companies declaring or distributing dividend, are required
to pay a Corporate
Dividend Tax in addition to the tax levied on their
income. The dividend received by the shareholders is then exempt in
their hands.Dividend-paying firms in India fell from 24 per cent in
2001 to almost 16 per cent in 2009 before rising to 19 per cent in
2010. However, dividend income over and above Rs. 1,000,000 shall
attract 10 per cent dividend tax in the hands of the shareholder with
effect from April 2016.
Effect on stock price
After a stock goes ex-dividend (i.e. when a dividend has just been
paid, so there is no anticipation of another imminent dividend
payment), the stock price should drop.
To calculate the amount of the drop, the traditional method is to view
the financial effects of the dividend from the perspective of the
company. Since the company has paid say £x in dividends per share out
of its cash account on the left hand side of the balance sheet, the
equity account on the right side should decrease an equivalent amount.
This means that a £x dividend should result in a £x drop in the
A more accurate method of calculating this price is to look at the
share price and dividend from the after-tax perspective of a share
holder. The after-tax drop in the share price (or capital gain/loss)
should be equivalent to the after-tax dividend. For example, if the
tax of capital gains Tcg is 35%, and the tax on dividends Td is 15%,
then a £1 dividend is equivalent to £0.85 of after-tax money. To get
the same financial benefit from a capital loss, the after-tax capital
loss value should equal £0.85. The pre-tax capital loss would be
£0.85/(1-Tcg) = £0.85/(1-35%) = £0.85/65% = £1.30. In this case, a
dividend of £1 has led to a larger drop in the share price of £1.30,
because the tax rate on capital losses is higher than the dividend tax
Finally, security analysis that does not take dividends into account
may mute the decline in share price, for example in the case of a
Price–earnings ratio target that does not back out cash; or amplify
the decline, for example in the case of Trend following.
Some believe that company profits are best re-invested in the company:
research and development, capital investment, expansion, etc.
Proponents of this view (and thus critics of dividends per se) suggest
that an eagerness to return profits to shareholders may indicate the
management having run out of good ideas for the future of the company.
Some studies, however, have demonstrated that companies that pay
dividends have higher earnings growth, suggesting that dividend
payments may be evidence of confidence in earnings growth and
sufficient profitability to fund future expansion.
Taxation of dividends is often used as justification for retaining
earnings, or for performing a stock buyback, in which the company buys
back stock, thereby increasing the value of the stock left
When dividends are paid, individual shareholders in many countries
suffer from double taxation of those dividends:
the company pays income tax to the government when it earns any
income, and then
when the dividend is paid, the individual shareholder pays income tax
on the dividend payment.
In many countries, the tax rate on dividend income is lower than for
other forms of income to compensate for tax paid at the corporate
A capital gain should not be confused with a dividend. Generally, a
capital gain occurs where a capital asset is sold for an amount
greater than the amount of its cost at the time the investment was
purchased. A dividend is a parsing out a share of the profits, and is
taxed at the dividend tax rate. If there is an increase of value of
stock, and a shareholder chooses to sell the stock, the shareholder
will pay a tax on capital gains (often taxed at a lower rate than
ordinary income). If a holder of the stock chooses to not participate
in the buyback, the price of the holder's shares could rise (as well
as it could fall), but the tax on these gains is delayed until the
sale of the shares.
Certain types of specialized investment companies (such as a REIT in
the U.S.) allow the shareholder to partially or fully avoid double
taxation of dividends.
Shareholders in companies that pay little or no cash dividends can
reap the benefit of the company's profits when they sell their
shareholding, or when a company is wound down and all assets
liquidated and distributed amongst shareholders. This, in effect,
delegates the dividend policy from the board to the individual
shareholder. Payment of a dividend can increase the borrowing
requirement, or leverage, of a company.
Other corporate entities
Cooperative businesses may retain their earnings, or distribute part
or all of them as dividends to their members. They distribute their
dividends in proportion to their members' activity, instead of the
value of members' shareholding. Therefore, co-op dividends are often
treated as pre-tax expenses. In other words, local tax or accounting
rules may treat a dividend as a form of customer rebate or a staff
bonus to be deducted from turnover before profit (tax profit or
operating profit) is calculated.
Consumers' cooperatives allocate dividends according to their members'
trade with the co-op. For example, a credit union will pay a dividend
to represent interest on a saver's deposit. A retail co-op store chain
may return a percentage of a member's purchases from the co-op, in the
form of cash, store credit, or equity. This type of dividend is
sometimes known as a patronage dividend or patronage refund, as well
as being informally named divi or divvy.
Producer cooperatives, such as worker cooperatives, allocate dividends
according to their members' contribution, such as the hours they
worked or their salary.
In real estate investment trusts and royalty trusts, the distributions
paid often will be consistently greater than the company earnings.
This can be sustainable because the accounting earnings do not
recognize any increasing value of real estate holdings and resource
reserves. If there is no economic increase in the value of the
company's assets then the excess distribution (or dividend) will be a
return of capital and the book value of the company will have shrunk
by an equal amount. This may result in capital gains which may be
taxed differently from dividends representing distribution of
The distribution of profits by other forms of mutual organization also
varies from that of joint-stock companies, though may not take the
form of a dividend.
In the case of mutual insurance, for example, in the United States, a
distribution of profits to holders of participating life policies is
called a dividend. These profits are generated by the investment
returns of the insurer's general account, in which premiums are
invested and from which claims are paid.  The participating
dividend may be used to decrease premiums, or to increase the cash
value of the policy.  Some life policies pay nonparticipating
dividends. As a contrasting example, in the United Kingdom, the
surrender value of a with-profits policy is increased by a bonus,
which also serves the purpose of distributing profits. Life insurance
dividends and bonuses, while typical of mutual insurance, are also
paid by some joint stock insurers.
Insurance dividend payments are not restricted to life policies. For
example, general insurer
State Farm Mutual Automobile Insurance
Company can distribute dividends to its vehicle insurance
CSS dividend policy
List of companies paying scrip dividends
^ O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics:
Principles in Action. Upper Saddle River, New Jersey 07458: Pearson
Prentice Hall. p. 273. ISBN 0-13-063085-3.
^ Michael Simkovic, "The Effect of Enhanced Disclosure on Open Market
Stock Repurchases", 6 Berkeley Bus. L.J. 96 (2009).
^ Amedeo De Cesari, Susanne Espenlaub, Arif Khurshed and Michael
Simkovic, "The Effects of Ownership and
Stock Liquidity on the Timing
of Repurchase Transactions", 2010
^ "dividend". Online Etymology Dictionary. Douglas Harper. 2001.
Retrieved November 9, 2006.
^ Freedman, Roy S.: Introduction to Financial Technology. (Academic
Press, 2006, ISBN 0123704782)
DK Publishing (Dorling Kindersley): The Business Book (Big Ideas
Simply Explained). (DK Publishing, 2014, ISBN 1465415858)
^ Huston, Jeffrey L.: The Declaration of Dependence: Dividends in the
Twenty-First Century. (Archway Publishing, 2015, ISBN 1480825042)
^ Chambers, Clem (14 July 2006). "Who needs stock exchanges?".
MondoVisione.com. Retrieved 14 May 2017.
Stock Splits and
Stock Dividends Management".
^ "Exhibit 5, LLC" (PDF).
^ U.S. Securities and Exchange Commission Archived January 3, 2011, at
the Wayback Machine.
^ "SEC.gov - Ex-
Dividend Dates: When Are You Entitled to
Cash Dividends". www.sec.gov.
^ "Definition of 'Dividend'". The Economic Times. Retrieved
^ Robert D. Arnott & Clifford S. Asness (January–February 2003).
"Surprise! Higher Dividends equal Higher Earnings Growth". Financial
Analysts Journal. SSRN 390143 .
Ace Hardware (March 22, 2001). "Annual Report, Section 1, Business,
10-K405 SEC Filing". Archived from the original on December 7,
^ "Co-op pays out £19.6m in 'divi'".
BBC News via bbc.co.uk. June 28,
2007. Retrieved May 15, 2008.
^ Nikola Balnave & Greg Patmore. "The History
Conference Proceedings - ASSLH - Rochdale consumer co-operatives and
Australian labour history". Archived from the original on October 4,
^ Norris, Sue (March 3, 2007). "Cooperatives pay big dividends". The
Guardian. Retrieved June 9, 2009.
^ "What Are Dividends?". New York Life. Archived from the original on
May 11, 2008. Retrieved April 29, 2008. In short, the portion of the
premium determined not to have been necessary to provide coverage and
benefits, to meet expenses, and to maintain the company's financial
position, is returned to policyowners in the form of dividends.
^ Hoboken, NJ (2002). "24, Investment-Oriented Life Insurance". In
Fabozzi, Frank J. Handbook of Financial Instruments. Wiley.
p. 591. ISBN 0-471-22092-2. OCLC 52323583.
State Farm Announces $1.25 Billion Mutual Auto Policyholder
Dividend". State Farm. March 1, 2007.
Look up dividend in Wiktionary, the free dictionary.
Dividend Dates: When Are You Entitled to
– U.S. Securities and Exchange Commission
Why Should Companies Pay Dividends?
Dividend Policy from studyfinance.com at the University of Arizona
The new U.S. dividend tax cut traps from Tennessee CPA Journal, Nov.
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