Special Topics

Dimayacyac, Mary Cyndy D.

Dividend

A dividend is the distribution of some of a company's earnings to a class of its shareholders, as determined by the
company's board of directors. Common shareholders of dividend-paying companies are typically eligible as long as
they own the stock before the ex-dividend date. 1 Dividends may be paid out as cash or in the form of additional
stock.

Dividend meaning eto yung dinidistribute sa shareholders bilang reward sap ag-iinvest nila sa kompanya

Ex dividend is yung 2 days before the record date

Four Important Dates

Announcement date: Dividends are announced by company management on the announcement date, and must
be approved by the shareholders before they can be paid.

Ex-dividend date: The date on which the dividend eligibility expires is called the ex-dividend date or simply the ex-
date. For instance, if a stock has an ex-date of Monday, May 5, then shareholders who buy the stock on or after
that day will NOT qualify to get the dividend as they are buying it on or after the dividend expiry date.
Shareholders who own the stock one business day prior to the ex-date—that is on Friday, May 2, or earlier—will
receive the dividend.1

Record date: The record date is the cut-off date, established by the company in order to determine which
shareholders are eligible to receive a dividend or distribution.1

Payment date: The company issues the payment of the dividend on the payment date, which is when the money
gets credited to investors' accounts.

Preferred Dividend

A preferred dividend is a dividend that is allocated to and paid on a company's preferred shares. If a company is
unable to pay all dividends, claims to preferred dividends take precedence over claims to dividends that are paid
on common shares.

One benefit of preferred stock is that it typically pays higher dividend rates than common stock of the same
company.

Dividend Decision

The Dividend Decision is one of the crucial decisions made by the finance manager relating to the payouts to the
shareholders. The payout is the proportion of Earning Per Share given to the shareholders in the form of dividends.
Determinants of Dividend Policy

Dividend Pay Out Ratio

Dividend Pay-out (D/P) ratio (i.e., percentage share of the net earnings/profits distributed to the shareholders by
way of dividends) also affects the dividend policy of a firm. It involves the decisions either to pay out the earnings
or to retain the same for re-investment within the firm. Needless to mention that retained earnings also constitute
a reliable source of funds.

Stability of Dividends

imply refers to the payment of dividend regularly and shareholders, generally, prefer payment of such regular
dividends.

Legal Restrictions

This is one of the most significant factors which are to be taken into account while considering dividend policy of a
firm since it has to be evolved within the legal framework and restrictions. It is not legally binding on the part of
the directors to declare dividends. Dividend shall be declared or paid only out of current profit or past profits after
charging depreciation although the Central Government has empowered to allow any company for paying
dividends out of current profits for any financial year before charging depreciation.

Owner’s Considerations

The dividend policy is also to be affected by the owner’s consideration of:

(a) Their opportunities of investment; and

(b) The dilution of ownership.

(a) Owner’s opportunities of Investment:

If the rate of return which is earned by a firm is less than the return which have been earned by the investors from
outside investment, a firm should not retain such funds, which in other words, will be detrimental to the interest
of the members although it is difficult to ascertain the rate of alternative investment as well as alternative
investment opportunities of its shareholders.

(b) Dilution of Ownership:

A high (D/P) Ratio recognises the dilution of ownership both from the standpoint of control as well as from the
view point of earnings of the existing shareholders. These two aspects adversely affect the existing shareholders
right.Because, in the latter case, (dilution of earnings) low retentions may compel the firm to issue first equity
shares which will increase the total number of equity shares and as such, the same will lower the earning per share
(EPS) and market price will go down consequently. On the contrary, if percentage of retained earnings becomes
high, dilution of earnings will be minimised.
Capital Market Considerations

This also affects the dividend policy to the extent to which the firm has access to the capital market In other words,
if easy access to the capital market is possible whether due to financially strong or, big in size, the firm in that case,
may adopt a liberal dividend policy.In the opposite case, i.e., if easy access to capital market is not possible, it must
have to adopt a low dividend pay-out ratio, i.e., they have to follow a conservative dividend policy. As such, they
must have to rely more on their own funds, viz retained earnings.

Inflation

Inflation may also affect the dividend policy of a firm. With rising prices, funds which are generated by way of
depreciation may fall short in order to replace obsolete equipment. The shortfall may be made from retained
earnings (as a source of funds). This is very significant when the assets are to be replaced in the near future. As
such, the dividend pay-out ratio tends to be low during the periods of inflation.

Types of Dividend Policy

Regular Dividend Policy

A regular dividend policy, also known as a constant dividend policy, sees payouts closely linked to the company’s
performance, both rising and falling in line with earnings. This often involves setting a payout rate. For example,
a payout rate of 20% would mean shareholders will collectively receive 20% of the company’s earnings each year,
whether that be 20% of a £10,000 profit or 20% of a £10 million profit.  

The main characteristic of a regular dividend policy is that payouts move in line with earnings: if the company
reports a 50% rise in profit then dividends should follow suit, but if they fall 50% then so will the dividend. This
means investors reap the reward of a stellar year but also lose out if times have become tough.  

Stable Dividend Policy

Stability or regularity of dividends is considered as a desirable policy by the management of most companies.
Shareholders also generally favour this policy and value stable dividends higher than the fluctuating ones. All other
things being the same, stable dividends have a positive impact on the market price of the share.

1. Constant dividend per share:

A number of companies follow the policy of paying a fixed amount per share as dividend every year, irrespective of
the fluctuations in the earnings. This policy does not imply that the dividend per share will never be increased.
2. Constant pay-out ratio

The ratio of dividend to earnings is known as payout ratio. Some companies follow a policy of constant payout
ratio, i.e., paying a fixed percentage of net earnings every year. With this policy the amount of dividend will
fluctuate in direct proportion to earnings. If a company adopts a 40 per cent payout ratio, then 40 percent of every
rupee of net earnings will be paid out.

3. Small constant dividend per share plus extra dividend:

Under this policy a small amount of dividend is fixed to reduce the possibility of ever missing a dividend payment
and extra dividend is paid in periods of prosperity.This type of a policy enables a company to pay constant amount
of dividend regularly without a default and allows a great deal of flexibility for supplementing the income of
shareholders only when the company’s earnings are higher than the usual.

Irregular Dividend Policy

Under the irregular dividend policy, the company is under no obligation to pay its shareholders and the board of
directors can decide what to do with the profits. If they a make an abnormal profit in a certain year, they can
decide to distribute it to the shareholders or not pay out any dividends at all and instead keep the profits for
business expansion and future projects.

No Dividend Policy

Under the no dividend policy, the company doesn’t distribute dividends to shareholders. It is because any profits
earned is retained and reinvested into the business for future growth. Companies that don’t give out dividends are
constantly growing and expanding, and shareholders invest in them because the value of the company stock
appreciates. For the investor, the share price appreciation is more valuable than a dividend payout.

Types of Dividends

Interim Dividends

An interim dividend is a dividend payment made before a company's annual general meeting (AGM) and the
release of final financial statements. This declared dividend usually accompanies the company's interim financial
statements. The interim dividend is issued more frequently in the United Kingdom where dividends are often paid
semi-annually. The interim dividend is typically the smaller of the two payments made to shareholders.

Proposed Dividends
Proposed dividend is another important source of financing temporary working capital like the provision for
taxation. It also provides funds for financing the time gap between dividend proposed and the dividend distributed
to the shareholders.

Final Dividend

Final dividend is the amount declared by the board of directors to be payable as dividend to the shareholders of
the company after the financial statements are prepared and issued by the company for the relevant financial
year and is commonly announced in the annual general meeting of the company.

Unclaimed Dividend

Unclaimed dividend are those dividend which have been paid by the company but they are not taken or claimed by
the shareholder, the reason for dividend being not claimed may be ignorance or shareholder may have shifted to
other place and therefore missed the dividend cheque. Unclaimed dividends are shown under current liability and
provisions in the balance sheet of the company, since shareholder can claim these dividends any time.

Liquidating Dividend

A liquidating dividend is a dividend issued by a business as part of its liquidation process. Liquidation is the process
by which a company ends its business activities and exits the market. Liquidation can be voluntary or involuntary
(forced).

Stock Dividend

Stock Dividend is the dividend declared from the profits of the company which is discharged by the company by
issuing additional shares to the shareholders of the company rather than paying such amount in cash and generally
company opts for stock dividend payout when there is a shortage of cash in the company.

Dividend in asset form