Dividends are payments made by a corporation to one or more of its shareholders with respect to its stock. It is the portion of corporate profits paid out to stockholders. The distribution by the corporation must be in the ordinary course of the corporation’s business. A dividend is a taxable income. The dividend is most often referred to in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.
Dividends are usually settled on a cash basis, store credits and shares in the company (either newly-created shares or existing shares bought in the market.) Moreover,many public companies offer dividend reinvestment plans, which automatically use the cash dividend to purchase additional shares for the shareholder. Generally, the more secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this. High-growth companies rarely offer dividends because all of their profits are reinvested to help sustain the higher-than-average growth.
Regular cash dividends are those paid out of a company’s profits to the shareholders. A property dividend is when a company distributes property to shareholders instead of cash or stock. Property dividends can literally take the form of railroad cars, cocoa beans, pencils, gold, silver, salad dressing or any other item with tangible value. Property dividends are recorded at market value on the declaration date.
In addition to cash dividends and property dividends, there are times a company may pay a special one-time dividend. A special one time dividend can take the form of cash, stock, or property dividends. These payments are not a payout of the company’s profits but instead a return of money which shareholders have invested in the business.
A stock dividend is a pro-rata distribution of additional shares of a company’s stock to owners of the common stock. A company may opt for stock dividends for a number of reasons including inadequate cash on hand or a desire to lower the price of the stock on a per-share basis to prompt more trading and increase liquidity.
Mutual funds pay out interest and dividend income received from their portfolio holdings as dividends to fund shareholders. In addition, realized capital gains from the portfolio’s trading activities are generally paid out (capital gains distribution) as a year-end dividend.