What is Dividend ?
A dividend can be defined as the way through which a company distributes its wealth (earnings) produced from business operation. Dividends may range from cash, stock or property. Most of the companies prefer to provide dividends to its investors alias shareholders. If a company receives a profit or surplus, it can either re-invest it in the business known as retained earnings), or allocate it to shareholders. A company may preserve a part of its earnings and disburse the rest as a dividend. Dividends are paid on a yearly or a quarterly basis.
Generally allocation to shareholders is made in cash (usually a deposit into a bank account) or, if the company has a dividend reinvestment plan, the amount is distributed by the issue of additional shares or share repurchase.
All registered shareholders can receive dividend on the record date of announcement of the dividend. A dividend is allocated as a fixed amount for each share, with shareholders getting a dividend in proportion to their shareholding. As for instance, if an investor buys single share of stock ABC, which disburses 20 pounds quarterly, the investor will receive 20 pounds for each share owned, four times annually.
If the dividend is a final dividend, it generally depends on the approval at the AGM. Alternatively, interim dividends are provided a few days after the record date. In both cases, one has to purchase the shares prior to the ex-dividend date to make sure that the shares are transferred to demat account by the record date.
Cash dividends are popular type of payment and are disbursed in currency, through electronic funds transfer or a printed paper check. Such dividends are categorized as an investment income and generally tax is charged to the recipient in the year they are remunerated. This system is generally followed for distributing corporate profits with the shareholders of the company. A declared amount of money is disbursed for each share a shareholder owns. Dividends reimbursed are not categorized as an expense, but considered as a deduction of retained earnings. Dividends reimbursed are not provided on an income statement but shown on the balance sheet.
Public companies generally reimburse dividends on a fixed schedule, but may announce a dividend at any time, sometimes known as special dividend to separate it from the fixed schedule dividends. Cooperatives, allot dividends as per their members' activity, so their dividends are often taken as a pre-tax expense.