Depending on the risk appetite and return expectations, investors may choose an investment strategy of picking a stock with decent dividend history and potentially stable dividend payouts by the company in the future. The company pays a portion of the company’s earnings to its shareholders in the form of a dividend. Company’s Board of Directors has the authority to decide about the company’s dividends although the shareholders must approve the decision through their voting rights.
Below are some terms which need to be understood by investors while evaluating dividend announcement by the company:
- Declaration Date – On this date, the company’s management make a public announcement about the approval of the dividend payment
- Record Date – On the record date, the dividend is allocated to those shareholders who hold the company’s share till that time.
- Payment Date – On this date, the company pays the actual dividend to its shareholders.
Types of Dividend
There are various types of dividends available in the market which the company can choose according to its financial health. Some of the dividend types are:
- Stock Dividend – At times the company pays a dividend in the form of additional shares to its shareholders rather than a traditional cash payout. The company may adopt to this payout mechanism in situations of facing liquidity issues or if it wants to hold cash for future investments and business expansion. For instance, the management approves an 8% stock dividend, which means that an investor who owns 50 shares in a company may receive 4 additional shares.
- Cash Dividend – In this, the management makes a public announcement that they are going to pay a certain portion of its earnings as a dividend in the form of cash to those shareholders who hold the company’s stock on a specific date. The company follows some procedure while paying dividends to its shareholders.
- Property Dividend – Sometimes, the company issues property dividend to its shareholders. It’s a non-monetary dividend. In simple terms, the company chooses to distribute an asset to the shareholders rather than cash. A property dividend can be issued in various forms such as inventory, vehicle, real estate, etc. The payment of a dividend in kind involves recording the property at fair market value, with its difference between book value recorded as profit/loss.
- Liquidating Dividend – In this kind of dividend distribution, the company’s management decides to return the original capital invested by the equity shareholders in the form of dividends. These steps are usually taken when the firm wants to wind up its operations of the company or at the time of final closure.
- Scrip Dividend – In this, the company anticipates that in the near future they might not be able to pay dividends to its shareholders. So, in that case, the company issues a scrip dividend, which is usually a promissory note. This dividend may or may not bear any interest, and it holds shorter maturity periods.
Australia follows a dividend imputation mechanism wherein companies adopt the concept of Franked Dividends and offers franking credits (certain portion/all of dividend tax paid by the company) along with regular dividend to shareholders. Subsequently, the investors can claim tax relief equal to the amount of credits received. The dividends may be fully or partially franked depending upon the interests of the company. The Australian Labor party is, however, proposing a ban on tax refunds in dividend imputation system with growing pessimism among market player to redesign their portfolios accordingly.
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