Dividend: Meaning, Types, and Forms
Prerequisites
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1. What is Dividend?
Dividend is the portion of a company's profit distributed to its equity shareholders as a reward for their investment in the company.
Simple Definition: Share of profit paid to shareholders.
2. Key Concepts
2.1 Dividend vs Retained Earnings
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Trade-off: Pay dividend (satisfy shareholders) vs Retain (grow business)
3. Types of Dividends
3.1 Cash Dividend
Definition: Dividend paid in cash (money).
Most Common: Nearly all dividends are cash dividends.
Example: "₹5 per share as dividend" means each shareholder receives ₹5 cash for every share held.
Impact:
- Cash outflow from company
- Reduces cash and reserves
- Taxable in shareholders' hands
3.2 Stock Dividend (Bonus Shares)
Definition: Dividend paid in the form of additional shares instead of cash.
Example: "10% stock dividend" means 1 bonus share for every 10 shares held.
If shareholder has 100 shares → Gets 10 additional shares (total 110 shares)
Impact:
- No cash outflow from company
- Increases number of shares outstanding
- Reduces Earnings Per Share (EPS) due to more shares
- Not immediately taxable
Why companies issue:
- Conserve cash while rewarding shareholders
- Signal of confidence in future growth
3.3 Scrip Dividend
Definition: Dividend in the form of a promissory note (scrip) promising to pay cash later.
Use Case: When company wants to declare dividend but lacks immediate cash.
Example: "Scrip dividend of ₹10 per share payable after 6 months"
Rare: Not commonly used in modern practice.
3.4 Property Dividend
Definition: Dividend paid in the form of physical assets (inventory, securities, equipment).
Example: A liquor company giving bottles of whisky to shareholders (rare and impractical).
Very Rare: Almost never used in practice.
4. Forms of Dividend Distribution
4.1 Final Dividend
Declared: At the Annual General Meeting (AGM) after full year's results.
Approval: Requires shareholder approval at AGM.
Example: "Final dividend of ₹8 per share for FY 2023-24"
4.2 Interim Dividend
Declared: During the financial year (before year-end).
Approval: Board of Directors can declare without shareholder approval.
Example: "Interim dividend of ₹3 per share for H1 2023-24"
Reason: To distribute profits from good performance without waiting for year-end.
4.3 Special Dividend (One-time)
Definition: Extraordinary dividend paid due to exceptional profits or asset sale.
Example: "Special one-time dividend of ₹50 per share due to sale of land"
Not Regular: Doesn't set expectation for future.
5. Important Legal Terms
5.1 Dividend Declaration Date
Date when Board announces the dividend.
5.2 Record Date
Critical: Shareholders registered on this date are eligible to receive dividend.
5.3 Ex-Dividend Date
Usually 2 days before record date: Shares purchased on or after this date do NOT get the dividend.
Example:
Declaration Date: Jan 10
Record Date: Jan 20
Ex-Dividend Date: Jan 18
If you buy shares on Jan 17 → You GET dividend
If you buy shares on Jan 18 or later → You DON'T GET dividend (despite buying before record date)
5.4 Payment Date
Date when dividend is actually paid/credited to shareholders.
6. Dividend Yield
Dividend Yield = (Dividend Per Share / Market Price Per Share) × 100
Example:
DPS = ₹10
Market Price = ₹200
Dividend Yield = (10/200) × 100 = 5%
Interpretation: Shareholder earns 5% return from dividend alone (excluding capital gains).
Exam Pattern Questions and Answers
Question 1: "Distinguish between Cash Dividend and Stock Dividend." (6 Marks)
Answer:
| Aspect | Cash Dividend | Stock Dividend |
|---|---|---|
| Form | Paid in cash (money) | Paid in shares (bonus shares) |
| Cash Outflow | Reduces company's cash | No cash outflow |
| Number of Shares | Remains same | Increases |
| EPS Impact | No impact on EPS | EPS decreases (more shares) |
| Tax | Immediately taxable | Not immediately taxable |
| Preference | Preferred by income-seeking investors | Preferred by growth-oriented investors |
Question 2: "What is ex-dividend date and why is it important?" (4 Marks)
Answer:
Ex-dividend date is the date on or after which a security is traded without the right to receive the recently declared dividend. It is usually set two business days before the record date.
Importance:
- Eligibility Determination: Only shareholders who purchase shares before the ex-dividend date are entitled to receive the dividend. Those buying on or after this date do not receive it.
- Price Adjustment: Stock price typically falls by approximately the dividend amount on the ex-dividend date to reflect that new buyers won't receive the dividend.
- Trading Strategy: Investors planning to receive dividends must ensure they buy shares before this date, making it a crucial date for dividend-seeking investors.
Summary
Dividend: Portion of profit distributed to shareholders.
Main Types:
- Cash Dividend: Money payment (most common)
- Stock Dividend: Additional shares (bonus shares)
- Scrip Dividend: Promise to pay later (rare)
- Property Dividend: Physical assets (very rare)
Forms:
- Final: Declared at AGM
- Interim: During the year
- Special: One-time extraordinary
Key Dates: Declaration → Ex-Dividend → Record → Payment
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Quiz Time! 🎯
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