All About Corporate Dividends
A dividend is a taxable payment made by a company to its shareholders out of the earnings of the company, usually on a quarterly basis. There is no law requiring companies to pay dividends. Companies which have crossed their growth phase and for whom reinvesting profits isn’t a big advantage anymore, offer dividends, choosing to pay shareholders. Dividends are paid only by public limited companies.
When there is profit, some of the amount gets poured back into the business or is retained. Some of the profits, at the discretion of the board of directors, can also be paid to the shareholders as dividend. The timing and exact method of payment differs. In the U S, they are declared quarterly, generally by the company’s board of directors who have complete discretionary powers over amount and frequency. If a company runs into loss during the year, it may continue to pay dividends from retained earnings of past years or suspend dividend payments. In the case of the company making a large one-time gain, it may not want to reinvest the money and will often pay a special dividend.
Dividends can take various forms. Cash dividends are the most common. These are paid as real cash and are a form of taxable investment interest or income. The recipient must pay taxes on these in the year of payment. Dividends are also quite often paid as stock and are called stock or scrip dividends. These are more stocks or shares of the same corporation or a subsidiary. The payments are proportional to the shares already owned by the stockholders. So, for example, if you own 100 shares of stock, your 10% stock dividend for the year would be 10 additional shares. Property dividends are rare and known as dividends in specie and are paid in the form of assets, products or services by the company.
The dates to remember are the declaration date, ex-dividend date, record date and payment date. The declaration date is the day of announcement, by the board, of their intention to pay, creating a liability on the company books. The ex-dividend date is set by the exchange. It is a few days before the date of record, enabling the shareholder list the date of record to reflect the owners accurately. The Record date is the cut-off date and shareholders registered on or before the date receive the dividend. The payment date is when the checks are actually mailed or credits made to the brokerage accounts.
Dividends can lead to double taxation. The company pays income tax and the shareholder also pays income tax on the same money. Shareholders of companies paying little or no cash dividends benefit from the sale of their shareholding or on liquidation of the assets. Certain investment centric corporations in the US allow shareholders to avoid this double taxation, either fully or partially. In other cases, companies may offer a buy back option to their shareholders, buying back the shares and increasing the value of outstanding stock. The shareholder gains by paying a capital gains tax, with a rate lower than income tax.