Definition
The term dividend refers to the formal distribution of retained earnings, additional paid-in capital, or some other form of capital to shareholders. The payment of dividends to shareholders is approved by the company's board of directors, and can include cash, property, or stock.
Explanation
Typically, companies will issue dividends to shareholders from the company's retained earnings, or profits, on a quarterly basis. Payment is usually quoted in terms of dollars per share, but can also be quoted in terms of a dividend yield.
Not all companies pay dividends to shareholders; instead, the management team will invest the profits back into the company in ways that generate additional profits. This is especially true for companies that are rapidly growing.
The payment of dividends must be formally approved by the company's board of directors, even if the company has a long history of quarterly payments. While cash is the most common form of dividends paid by a company, they can take all of the following forms:
Cash: paid from the company's retained earnings, or profits.
Property: also known as "dividend in kind," this includes any assets of the company other than cash.
Liquidating: if a dividend is paid and retained earnings are not the source of funding, there is a reduction to paid-in capital and a liquidating dividend results.
Scrip: instead of paying a dividend immediately, a scrip dividend is declared and payable at a future point in time.
Stock: companies can reclassify retained earnings as contributed capital and issue a stock dividend instead of cash.
Related Terms
The financial accounting term dividends payable is used to describe the cash owed by a company to its stockholders, based on a distribution that has been formally authorized by the company's board of directors. Dividends payable are categorized as a current liability on the company's balance sheet.
Moneyzine EditorJanuary 16th, 2024
The term cash dividend normally refers to the formal distribution of retained earnings to the holders of preferred or common shares of stock. Typically, the company's board of directors would vote on a declaration of dividends, which is stated in terms of dollars per share or a percentage basis.Moneyzine EditorJanuary 10th, 2024- The term property dividend refers to the formal distribution of an asset other than cash to holders of preferred or common shares of stock. A property dividend can take many forms, including real estate, items held in inventory, equipment, and even investments held by the company.Moneyzine EditorSeptember 21st, 2023
The term liquidating dividend refers to the process of providing shareholders with a partial or full distribution of their capital investment in the company. Liquidating dividends are typically paid when a company is going out of business or has sold a portion of the enterprise.Moneyzine EditorJanuary 23rd, 2024- The term scrip dividend refers to the process of providing shareholders with the choice of receiving a cash dividend, a dividend at a future point in time, or common stock. When a corporation issues a scrip dividend, they're allowing shareholders to increase the size of their holdings without incurring any fees.Moneyzine EditorSeptember 21st, 2023
- The term stock dividend refers to the process of reclassifying retained earnings as contributed capital, and the issuing of stock instead of cash to shareholders. When a company pays a stock dividend, there is no distribution of assets. Instead, the total number of shares outstanding increases and the book value per share decreases.Moneyzine EditorSeptember 21st, 2023
The term dividend payout ratio refers to a measure of the dividends paid to shareholders relative to the net income generated by the company. The dividend payout ratio is an important profitability metric, and one that's closely watched by investors that rely on the payment of dividends as a source of household income.Moneyzine EditorJanuary 16th, 2024
