Dividend

From Wikipedia for FEVERv2
Jump to navigation Jump to search

This article is about financial dividends. Dividend_sentence_0

For dividends in arithmetic, see Division (mathematics). Dividend_sentence_1

A dividend is a distribution of profits by a corporation to its shareholders. Dividend_sentence_2

When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders. Dividend_sentence_3

Any amount not distributed is taken to be re-invested in the business (called retained earnings). Dividend_sentence_4

The current year profit as well as the retained earnings of previous years are available for distribution; a corporation usually is prohibited from paying a dividend out of its capital. Dividend_sentence_5

Distribution to shareholders may be in cash (usually a deposit into a bank account) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or by share repurchase. Dividend_sentence_6

In some cases, the distribution may be of assets. Dividend_sentence_7

The dividend received by a shareholder is income of the shareholder and may be subject to income tax (see dividend tax). Dividend_sentence_8

The tax treatment of this income varies considerably between jurisdictions. Dividend_sentence_9

The corporation does not receive a tax deduction for the dividends it pays. Dividend_sentence_10

A dividend is allocated as a fixed amount per share with shareholders receiving a dividend in proportion to their shareholding. Dividend_sentence_11

Dividends can provide stable income and raise morale among shareholders. Dividend_sentence_12

For the joint-stock company, paying dividends is not an expense; rather, it is the division of after-tax profits among shareholders. Dividend_sentence_13

Retained earnings (profits that have not been distributed as dividends) are shown in the shareholders' equity section on the company's balance sheet – the same as its issued share capital. Dividend_sentence_14

Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends. Dividend_sentence_15

Cooperatives, on the other hand, allocate dividends according to members' activity, so their dividends are often considered to be a pre-tax expense. Dividend_sentence_16

The word "dividend" comes from the Latin word "dividendum" ("thing to be divided"). Dividend_sentence_17

History Dividend_section_0

Further information: Financial history of the Dutch Republic and Dutch East India Company Dividend_sentence_18

In financial history of the world, the Dutch East India Company (VOC) was the first recorded (public) company ever to pay regular dividends. Dividend_sentence_19

The VOC paid annual dividends worth around 18 percent of the value of the shares for almost 200 years of existence (1602–1800). Dividend_sentence_20

Forms of payment Dividend_section_1

Cash dividends are the most common form of payment and are paid out in currency, usually via electronic funds transfer or a printed paper check. Dividend_sentence_21

Such dividends are a form of investment income of the shareholder, usually treated as earned in the year they are paid (and not necessarily in the year a dividend was declared). Dividend_sentence_22

For each share owned, a declared amount of money is distributed. Dividend_sentence_23

Thus, if a person owns 100 shares and the cash dividend is 50 cents per share, the holder of the stock will be paid $50. Dividend_sentence_24

Dividends paid are not classified as an expense, but rather a deduction of retained earnings. Dividend_sentence_25

Dividends paid does not appear on an income statement, but does appear on the balance sheet. Dividend_sentence_26

Different classes of stocks have different priorities when it comes to dividend payments. Dividend_sentence_27

Preferred stocks have priority claims on a company's income. Dividend_sentence_28

A company must pay dividends on its preferred shares before distributing income to common share shareholders. Dividend_sentence_29

Stock or scrip dividends are those paid out in the form of additional shares of the issuing corporation, or another corporation (such as its subsidiary corporation). Dividend_sentence_30

They are usually issued in proportion to shares owned (for example, for every 100 shares of stock owned, a 5% stock dividend will yield 5 extra shares). Dividend_sentence_31

Nothing tangible will be gained if the stock is split because the total number of shares increases, lowering the price of each share, without changing the market capitalization, or total value, of the shares held. Dividend_sentence_32

(See also Stock dilution.) Dividend_sentence_33

Stock dividend distributions do not affect the market capitalization of a company. Dividend_sentence_34

Stock dividends are not includable in the gross income of the shareholder for US income tax purposes. Dividend_sentence_35

Because the shares are issued for proceeds equal to the pre-existing market price of the shares; there is no negative dilution in the amount recoverable. Dividend_sentence_36

Property dividends or dividends in specie (Latin for "in kind") are those paid out in the form of assets from the issuing corporation or another corporation, such as a subsidiary corporation. Dividend_sentence_37

They are relatively rare and most frequently are securities of other companies owned by the issuer, however, they can take other forms, such as products and services. Dividend_sentence_38

Interim dividends are dividend payments made before a company's Annual General Meeting (AGM) and final financial statements. Dividend_sentence_39

This declared dividend usually accompanies the company's interim financial statements. Dividend_sentence_40

Other dividends can be used in structured finance. Dividend_sentence_41

Financial assets with known market value can be distributed as dividends; warrants are sometimes distributed in this way. Dividend_sentence_42

For large companies with subsidiaries, dividends can take the form of shares in a subsidiary company. Dividend_sentence_43

A common technique for "spinning off" a company from its parent is to distribute shares in the new company to the old company's shareholders. Dividend_sentence_44

The new shares can then be traded independently. Dividend_sentence_45

Dividend coverage Dividend_section_2

The most popular metric to determine the dividend coverage is the payout ratio. Dividend_sentence_46

Most often, the payout ratio is calculated based on dividends per share and earnings per share: Dividend_sentence_47

Dividend_description_list_0

  • Payout ratio = dividends per share/earnings per share × 100Dividend_item_0_0

A payout ratio greater than 100 means the company is paying out more in dividends for the year than it earned. Dividend_sentence_48

Dividends are paid in cash. Dividend_sentence_49

On the other hand, earnings are an accountancy measure and do not represent the actual cash-flow of a company. Dividend_sentence_50

Hence, a more liquidity-driven way to determine the dividend's safety is to replace earnings by free cash flow. Dividend_sentence_51

The free cash flow represents the company's available cash based on its operating business after investments: Dividend_sentence_52

Dividend_description_list_1

  • Payout ratio = dividends per share/free cash flow per share × 100Dividend_item_1_1

Dividend dates Dividend_section_3

A dividend that is declared must be approved by a company's board of directors before it is paid. Dividend_sentence_53

For public companies, four dates are relevant regarding dividends: Dividend_sentence_54

Declaration date — the day the board of directors announces its intention to pay a dividend. Dividend_sentence_55

On that day, a liability is created and the company records that liability on its books; it now owes the money to the shareholders. Dividend_sentence_56

In-dividend date — the last day, which is one trading day before the ex-dividend date, where shares are said to be cum dividend ('with [including] dividend'). Dividend_sentence_57

That is, existing shareholders and anyone who buys the shares on this day will receive the dividend, and any shareholders who have sold the shares lose their right to the dividend. Dividend_sentence_58

After this date the shares becomes ex dividend. Dividend_sentence_59

Ex-dividend date — the day on which shares bought and sold no longer come attached with the right to be paid the most recently declared dividend. Dividend_sentence_60

In the United States and many European countries, it is typically one trading day before the record date. Dividend_sentence_61

This is an important date for any company that has many shareholders, including those that trade on exchanges, to enable reconciliation of who is entitled to be paid the dividend. Dividend_sentence_62

Existing shareholders will receive the dividend even if they sell the shares on or after that date, whereas anyone who bought the shares will not receive the dividend. Dividend_sentence_63

It is relatively common for a share's price to decrease on the ex-dividend date by an amount roughly equal to the dividend being paid, which reflects the decrease in the company's assets resulting from the payment of the dividend. Dividend_sentence_64

Book closure date — when a company announces a dividend, it will also announce the date on which the company will temporarily close its books for share transfers, which is also usually the record date. Dividend_sentence_65

Record date — shareholders registered in the company's record as of the record date will be paid the dividend, while shareholders who are not registered as of this date will not receive the dividend. Dividend_sentence_66

Registration in most countries is essentially automatic for shares purchased before the ex-dividend date. Dividend_sentence_67

Payment date — the day on which dividend cheques will actually be mailed to shareholders or the dividend amount credited to their bank account. Dividend_sentence_68

Dividend frequency Dividend_section_4

The dividend frequency describes the number of dividend payments within a single business year. Dividend_sentence_69

Most relevant dividend frequencies are yearly, semi-annually, quarterly and monthly. Dividend_sentence_70

Some common dividend frequencies are quarterly in the US, semi-annually in Japan and Australia and annually in Germany. Dividend_sentence_71

Dividend-reinvestment Dividend_section_5

Some companies have dividend reinvestment plans, or DRIPs, not to be confused with scrips. Dividend_sentence_72

DRIPs allow shareholders to use dividends to systematically buy small amounts of stock, usually with no commission and sometimes at a slight discount. Dividend_sentence_73

In some cases, the shareholder might not need to pay taxes on these re-invested dividends, but in most cases they do. Dividend_sentence_74

Dividend taxation Dividend_section_6

Main article: Dividend tax Dividend_sentence_75

Most countries impose a corporate tax on the profits made by a company. Dividend_sentence_76

Most jurisdictions also impose a tax on dividends paid by a company to its shareholders (stockholders). Dividend_sentence_77

The tax treatment of a dividend income varies considerably between jurisdictions. Dividend_sentence_78

The primary tax liability is that of the shareholder, though a tax obligation may also be imposed on the corporation in the form of a withholding tax. Dividend_sentence_79

In some cases the withholding tax may be the extent of the tax liability in relation to the dividend. Dividend_sentence_80

A dividend tax is in addition to any tax imposed directly on the corporation on its profits. Dividend_sentence_81

Some jurisdictions do not tax dividends. Dividend_sentence_82

A dividend paid by a company is not an expense of the company. Dividend_sentence_83

Australia and New Zealand Dividend_section_7

Australia and New Zealand have a dividend imputation system, wherein companies can attach franking credits or imputation credits to dividends. Dividend_sentence_84

These franking credits represent the tax paid by the company upon its pre-tax profits. Dividend_sentence_85

One dollar of company tax paid generates one franking credit. Dividend_sentence_86

Companies can attach any proportion of franking up to a maximum amount that is calculated from the prevailing company tax rate: for each dollar of dividend paid, the maximum level of franking is the company tax rate divided by (1 - company tax rate). Dividend_sentence_87

At the current 30% rate, this works out at 0.30 of a credit per 70 cents of dividend, or 42.857 cents per dollar of dividend. Dividend_sentence_88

The shareholders who are able to use them, apply these credits against their income tax bills at a rate of a dollar per credit, thereby effectively eliminating the double taxation of company profits. Dividend_sentence_89

India Dividend_section_8

In India, a company declaring or distributing dividends is required to pay a Corporate Dividend Tax in addition to the tax levied on their income. Dividend_sentence_90

The dividend received by the shareholders is then exempt in their hands. Dividend_sentence_91

Dividend-paying firms in India fell from 24 per cent in 2001 to almost 19 per cent in 2009 before rising to 19 per cent in 2010. Dividend_sentence_92

However, dividend income over and above 1,000,000 attracts 10 per cent dividend tax in the hands of the shareholder with effect from April 2016. Dividend_sentence_93

United States and Canada Dividend_section_9

The United States and Canada impose a lower tax rate on dividend income than ordinary income, on the assertion that company profits had already been taxed as corporate tax. Dividend_sentence_94

Effect on stock price Dividend_section_10

After a stock goes ex-dividend (when a dividend has just been paid, so there is no anticipation of another imminent dividend payment), the stock price should drop. Dividend_sentence_95

To calculate the amount of the drop, the traditional method is to view the financial effects of the dividend from the perspective of the company. Dividend_sentence_96

Since the company has paid say £x in dividends per share out of its cash account on the left hand side of the balance sheet, the equity account on the right side should decrease an equivalent amount. Dividend_sentence_97

This means that a £x dividend should result in a £x drop in the share price. Dividend_sentence_98

A more accurate method of calculating this price is to look at the share price and dividend from the after-tax perspective of a share holder. Dividend_sentence_99

The after-tax drop in the share price (or capital gain/loss) should be equivalent to the after-tax dividend. Dividend_sentence_100

For example, if the tax of capital gains Tcg is 35%, and the tax on dividends Td is 15%, then a £1 dividend is equivalent to £0.85 of after-tax money. Dividend_sentence_101

To get the same financial benefit from a capital loss, the after-tax capital loss value should equal £0.85. Dividend_sentence_102

The pre-tax capital loss would be £0.85/1 − Tcg = £0.85/1 − 0.35 = £0.85/0.65 = £1.31. Dividend_sentence_103

In this case, a dividend of £1 has led to a larger drop in the share price of £1.31, because the tax rate on capital losses is higher than the dividend tax rate. Dividend_sentence_104

Finally, security analysis that does not take dividends into account may mute the decline in share price, for example in the case of a price–earnings ratio target that does not back out cash; or amplify the decline when comparing different periods. Dividend_sentence_105

Criticism Dividend_section_11

Some believe that company profits are best re-invested in the company: research and development, capital investment, expansion, etc. Dividend_sentence_106

Proponents of this view (and thus critics of dividends per se) suggest that an eagerness to return profits to shareholders may indicate the management having run out of good ideas for the future of the company. Dividend_sentence_107

Some studies, however, have demonstrated that companies that pay dividends have higher earnings growth, suggesting that dividend payments may be evidence of confidence in earnings growth and sufficient profitability to fund future expansion. Dividend_sentence_108

Taxation of dividends is often used as justification for retaining earnings, or for performing a stock buyback, in which the company buys back stock, thereby increasing the value of the stock left outstanding. Dividend_sentence_109

When dividends are paid, individual shareholders in many countries suffer from double taxation of those dividends: Dividend_sentence_110

Dividend_ordered_list_2

  1. the company pays income tax to the government when it earns any income, and thenDividend_item_2_2
  2. when the dividend is paid, the individual shareholder pays income tax on the dividend payment.Dividend_item_2_3

In many countries, the tax rate on dividend income is lower than for other forms of income to compensate for tax paid at the corporate level. Dividend_sentence_111

A capital gain should not be confused with a dividend. Dividend_sentence_112

Generally, a capital gain occurs where a capital asset is sold for an amount greater than the amount of its cost at the time the investment was purchased. Dividend_sentence_113

A dividend is a parsing out a share of the profits, and is taxed at the dividend tax rate. Dividend_sentence_114

If there is an increase of value of stock, and a shareholder chooses to sell the stock, the shareholder will pay a tax on capital gains (often taxed at a lower rate than ordinary income). Dividend_sentence_115

If a holder of the stock chooses to not participate in the buyback, the price of the holder's shares could rise (as well as it could fall), but the tax on these gains is delayed until the sale of the shares. Dividend_sentence_116

Certain types of specialized investment companies (such as a REIT in the U.S.) allow the shareholder to partially or fully avoid double taxation of dividends. Dividend_sentence_117

Shareholders in companies that pay little or no cash dividends can reap the benefit of the company's profits when they sell their shareholding, or when a company is wound down and all assets liquidated and distributed amongst shareholders. Dividend_sentence_118

This, in effect, delegates the dividend policy from the board to the individual shareholder. Dividend_sentence_119

Payment of a dividend can increase the borrowing requirement, or leverage, of a company. Dividend_sentence_120

Other corporate entities Dividend_section_12

Cooperatives Dividend_section_13

Cooperative businesses may retain their earnings, or distribute part or all of them as dividends to their members. Dividend_sentence_121

They distribute their dividends in proportion to their members' activity, instead of the value of members' shareholding. Dividend_sentence_122

Therefore, co-op dividends are often treated as pre-tax expenses. Dividend_sentence_123

In other words, local tax or accounting rules may treat a dividend as a form of customer rebate or a staff bonus to be deducted from turnover before profit (tax profit or operating profit) is calculated. Dividend_sentence_124

Consumers' cooperatives allocate dividends according to their members' trade with the co-op. For example, a credit union will pay a dividend to represent interest on a saver's deposit. Dividend_sentence_125

A retail co-op store chain may return a percentage of a member's purchases from the co-op, in the form of cash, store credit, or equity. Dividend_sentence_126

This type of dividend is sometimes known as a patronage dividend or patronage refund, as well as being informally named divi or divvy. Dividend_sentence_127

Producer cooperatives, such as worker cooperatives, allocate dividends according to their members' contribution, such as the hours they worked or their salary. Dividend_sentence_128

Trusts Dividend_section_14

In real estate investment trusts and royalty trusts, the distributions paid often will be consistently greater than the company earnings. Dividend_sentence_129

This can be sustainable because the accounting earnings do not recognize any increasing value of real estate holdings and resource reserves. Dividend_sentence_130

If there is no economic increase in the value of the company's assets then the excess distribution (or dividend) will be a return of capital and the book value of the company will have shrunk by an equal amount. Dividend_sentence_131

This may result in capital gains which may be taxed differently from dividends representing distribution of earnings. Dividend_sentence_132

The distribution of profits by other forms of mutual organization also varies from that of joint-stock companies, though may not take the form of a dividend. Dividend_sentence_133

In the case of mutual insurance, for example, in the United States, a distribution of profits to holders of participating life policies is called a dividend. Dividend_sentence_134

These profits are generated by the investment returns of the insurer's general account, in which premiums are invested and from which claims are paid. Dividend_sentence_135

The participating dividend may be used to decrease premiums, or to increase the cash value of the policy. Dividend_sentence_136

Some life policies pay nonparticipating dividends. Dividend_sentence_137

As a contrasting example, in the United Kingdom, the surrender value of a with-profits policy is increased by a bonus, which also serves the purpose of distributing profits. Dividend_sentence_138

Life insurance dividends and bonuses, while typical of mutual insurance, are also paid by some joint stock insurers. Dividend_sentence_139

Insurance dividend payments are not restricted to life policies. Dividend_sentence_140

For example, general insurer State Farm Mutual Automobile Insurance Company can distribute dividends to its vehicle insurance policyholders. Dividend_sentence_141

See also Dividend_section_15

Credits to the contents of this page go to the authors of the corresponding Wikipedia page: en.wikipedia.org/wiki/Dividend.