Types of dividends
- Ordinary dividends - cash withdrawals made directly to shareholders and forming part of ordinary business activities. They can be divided into:
- Regular dividends - paid from time to time, once a year, every six months, every quarter. Most US companies pay regular cash dividends four times a year. However, there are also monthly payments. If the dividends are paid too often, their nominal value is usually low, which means that with a small number of shares, the costs of transferring the dividend to the shareholders will be relatively high in relation to the value of the shares held.
- Irregular pay-outs - they do not have a specific payout time or fixed amount of dividend paid. Even when the dividend is paid out regularly, its value is variable, especially when it is expressed in relation to the dollar (in the case of foreign securities or in branches of American companies). This is due to some fluctuations in the exchange rate of a given currency in relation to the dollar.
- Additional dividends - may or may not be paid in the future. Most often, their payment is a consequence of extraordinary profits, which probably will not be repeated in the near future. The increased amount of the dividend would not be possible to keep in future periods. For this reason, enterprises usually pay regular dividends, and share additional profits with shareholders in the form of additional dividends. It is a policy suitable for companies that are characterized by cyclical sales and in which there are significant fluctuations in profits. By maintaining a constant level of cash dividends and increasing it in profitable years, the company is able to maintain the continuity of the dividend payment, the level of which is always guaranteed and possibly increased by an additional dividend, when increased profits allow. Sometimes companies may pay an additional dividend in a non-cash form, e.g. through securities.
- Special dividends - are reserved for withdrawals that are unlikely to happen again. They are paid in extraordinary circumstances.
- Liquidation dividends - paid when a part of the company's operations are closed or when it is closed. Because such dividends are treated as return on capital, they are not subject to income tax.
Dividends are not always in the form of cash. Sometimes companies divide the dividend in the form of shares or increase the nominal value of the existing shares. There are also cases where companies instead of dividends send samples of their products to shareholders.
The Commercial Code distinguishes two types of dividends:
- From ordinary shares - dividends are determined each time at the General Meeting of Shareholders, they remain in a specified relation to the nominal value of the shares.
- From preference shares - if the preference concerns the distribution of profit, voting rights at the General Meeting of Shareholders, allocation of shares or division of company assets in the event of liquidation, dividends on these shares take precedence over dividends on ordinary shares.
Dividends on preference shares can be accumulated over a 5-year period. The company's statute determines the form of their withdrawal and the method of cumulation. It may indicate that the outstanding preferential dividend is paid in full in the first year in which the company will make a profit, or that it is paid in installments in the next few installments. The privileged dividend can not be paid out of reserves, because the source of dividends is profits. However, the Company may create a special reserve fund out of profit to cover senior dividends in years in which no balance sheet profit has been recognized.
|Types of dividends — recommended articles|
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- DeAngelo, H., DeAngelo, L., & Skinner, D. J. (2000). Special dividends and the evolution of dividend signaling. Journal of Financial Economics, 57(3), 309-354.
- Allen, F., Bernardo, A. E., & Welch, I. (2000). A theory of dividends based on tax clienteles. The Journal of Finance, 55(6), 2499-2536.
- Baker, M., Nagel, S., & Wurgler, J. (2006). The effect of dividends on consumption (No. w12288). National Bureau of Economic Research.