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Dividends – Meaning and Various Types
Dividend – Meaning :
The term dividend is used to indicate that a part of the profits of a company, which is to be distributed amongst its shareholders. It may, therefore, be defined as the return that shareholders will get from the company, out of its profits, on his shareholdings.
According to the Institute of Chartered Accountants of India, dividend is, a distribution to shareholders out of profits or reserves available for this purpose. A company should not declare divided unless there are :
- Sufficient profits
- Board of Directors recommendation
- An acceptance of the shareholders in the annual general meeting.
Different types of Dividend :
there are several types of dividends, some of which do not involve the payment of cash to shareholders.
1. Final Dividend :
It is the amount of dividend paid annually, proposed by the board of directors and approved by the shareholders in general meeting. It is known as final dividend because it is usually paid subsequent to the finalization of accounts of the company.
No dividend is paid on calls in advance. And it’s the decision of company whether to pay dividend to those shares having calls in arrears by providing for the same in articles of association.
2. Interim Dividend :
It is the amount of dividend payable between the two Annual General Meeting before finalizing the accounts. Articles of association should permit the company to pay interim dividend.If Articles so permit, the directors may decide to pay dividend at any time between the two Annual General Meeting. No Interim Dividend can be declared without providing for depreciation for the whole financial year.
3. Cash dividend :
The cash dividend is the most common of the dividend types used. On the date of declaration of dividend, the board of directors resolves to pay a certain dividend amount in cash to those investors holding the company’s stock on a specific date. Usually companies having huge liquid cash pay dividend in the form of cash.
4. Stock dividend :
Payment stock dividend is popularly known as issue of bonus shares in India. Issue of bonus shares results in conversion of company’s profit into share capital. Companies, not having liquid cash position, generally pay dividend in the form of shares by capitalizing the profits and reserves.
5. Scrip dividend :
It is the dividend given in the form of promissory notes to pay the amount at a specific future date. The promissory note is known as scrips.When a company is a regular dividend paying company but temporarily its cash position is affected due to locking up of funds, which is likely to be released shortly, this opinion is preferred. Scrip may or may not be interest bearing.Such dividend was allowed before passing of the Companies Act 1960, but thereafter this unhealthy practice was stopped.
6. Bond Dividend :
In case the company does not have sufficient funds to pay dividend in cash it may issue bonds for the amount due to the shareholders by way of dividends. It has longer maturity date than Scrip dividend. It always carries interest. Thus, bondholders get regular interest on their bonds besides payment of bond money on the due date. But this practice is not allowed in India.
7. Property Dividend :
A company may issue a non-monetary dividend to investors, rather than making a cash or stock payment.The distribution of dividend is made whenever the asset is no longer required in the business such as investment or stock of finished goods.
In India distribution of dividend is permissible in the form of cash or bonus shares only. Distribution of dividend in any other form is not allowed.
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