Different Types of Dividends, Examples, Meaning

When it comes to investing, one aspect that captures the attention of investors is the potential to earn consistent returns from their investments. One way you can earn returns on stock market investments is through dividends. Investors across the globe eagerly await these regular payouts, as they signify a share in the profits generated by the company they have invested in. In this article, learn about dividends, their types, their impact on share prices, how to calculate them and more.

What are Dividends?

Dividends are regular payments made by a company to its shareholders as a way to distribute a portion of its profits. When a company generates earnings, it may choose to allocate a portion of those profits to shareholders in the form of dividends. These payments can be made in cash, additional shares of stock, or other assets.

Dividends serve as a reward for shareholders who have invested in the company, providing them with a tangible return on their investment. They are typically paid out quarterly or annually, depending on the company’s financial performance and dividend policy. Dividends are an essential component of many investors’ strategies, as they offer a steady stream of income and can contribute to long-term wealth accumulation.

Different Types of Dividends

1. Cash Dividend

This is a common type of dividend that companies distribute to their shareholders in the form of cash payments. When a company generates profits, it may choose to distribute a portion of those profits back to its shareholders as cash dividends. They are typically paid on a per-share basis, meaning that shareholders receive a certain amount of cash for each share they own.

For example, if a company declares a cash dividend of Rs. 10 per share and an investor owns 100 shares, they would receive a cash payment of Rs. 10*100 = Rs. 1,000. Cash dividends are usually paid out regularly, such as quarterly, semi-annually, or annually, depending on the company’s dividend policy.

2. Stock Dividend

Stock dividends are a type of dividend payment in which a company distributes additional shares of its own stock to existing shareholders instead of cash. These are often used by companies to conserve cash while still rewarding shareholders.

For example, if a company announces a 10% stock dividend and an investor owns 100 shares,

they would receive an additional 10 shares (10% of 100 shares) as a stock dividend. As a result, the investor’s total number of shares would increase to 110. The value of each share may decrease proportionally to account for the new shares issued.

3. Property Dividend

Property dividends are a type of dividend payment in which a company distributes assets or property to its shareholders instead of cash or additional shares. Instead of receiving cash or stock, shareholders receive tangible or intangible assets, such as inventory, real estate, intellectual property, or subsidiary company shares.

Property dividends are less common than cash or stock dividends and are typically issued when a company has excess assets that can be distributed among its shareholders. This type of dividend allows the company to monetize its assets or transfer ownership of certain assets to its shareholders.

For example, a real estate development company may distribute properties or rental units to its shareholders as property dividends. Shareholders would then become owners of those properties and may choose to sell, lease, or retain them as per their discretion.

4. Scrip Dividend

Scrip dividends are quite similar to stock dividends. In this, instead of additional shares, the shareholder will be getting scrips or vouchers that can be redeemed with shares on the market. They are a type of dividend payment in which a company issues additional shares of its own stock to its shareholders instead of cash or property. Instead of receiving a cash payout, shareholders receive additional shares of the company’s stock based on their existing shareholding.

For instance, if a company declares a scrip dividend of 10% and a shareholder owns 1,000 shares of the company, the shareholder would receive an additional 100 shares (10% of 1,000 shares) as a scrip dividend. The shareholder can hold on to these additional shares or choose to sell them in the market.

5. Liquidating Dividend

Liquidating dividends are given by a company when it is in the process of liquidating its assets and winding up its operations and therefore, cannot pay in the form of other dividends. Unlike regular dividends that are paid out of a company’s profits, liquidating dividends are paid from the company’s remaining assets after all debts and liabilities have been settled.

It’s important to note that liquidating dividends is typically subject to specific legal and regulatory requirements. The distribution of assets must follow the prescribed procedures outlined by the applicable laws and regulations governing the liquidation process.

For example, if a company decides to liquidate and has Rs. 10 million in assets remaining after paying off all debts and liabilities, it may distribute these assets as liquidating dividends to its shareholders.

Dividends can have an impact on share prices in several ways. A dividend announcement or increase can send a positive signal to investors, reflecting the company’s profitability and confidence in its future prospects, which can lead to increased demand for the stock and potentially drive up the share price. This can also attract income-seeking investors who rely on regular dividend payments for their investment income.

The expectation of consistent and attractive dividend payments can make a stock more desirable, increasing demand and potentially influencing the share price positively. Additionally, dividend capture strategies, dividend reinvestment, and the dividend yield relative to other stocks in the market can also affect share prices.

How are Dividends Calculated?

The company’s board of directors declares the dividend. It is based on factors such as the company’s profitability, financial health, and dividend policy. The calculation can be done on a per-share basis or as a total payout.

• For per-share calculation, the total dividend amount is divided by the number of outstanding shares to determine the dividend per share.
• The total dividend payout can be calculated by multiplying the dividend per share by the total number of shares held by shareholders.

Depending on the type of dividend paid, the calculation is made.

Importance Of Dividends in Financial Modelling

Dividends play a significant role in financial modelling as they impact a company’s cash flows and valuation. In financial models, dividend calculations involve projecting the amount and timing of dividend payments based on factors like dividend policies, payout ratios, and growth rates. These projections help assess a company’s financial performance and shareholder returns.

• In an income statement, the impact of dividends can cause a decrease in Profit After Taxes (PAT).
• In a balance sheet, there will be a rise in liabilities due to the dividend payable amount. And also the retained earnings and cash will reduce.
• In a cash flow statement, the dividend payments are under the ‘financing activities’ section as an outflow from the company.

Conclusion

Now that you are familiar with dividends and their types, make an informed decision only after understanding their pros and cons. Also, consider your investment objectives and risk appetite before investing. To get started with your investment journey, open a Demat Account now on Angel One for free. Happy Investing!