Most companies pay dividends every quarter (four times a year). They often pay upon declaring their quarterly account. However, dividend payout frequency may vary from company to company. Some companies may pay every six months (semi-annually) or annually or no set schedule (irregular dividends).
Company’s earnings are paid as dividends to the stockholders. In simple terms, investors earn for owning the stock. For dividend payouts, the following are the four important dates to remember:
Declaration date: It is the date when the Board of Directors of a company declare their intention to pay a dividend. For accounting purposes, the company on this day creates a liability in its books. It now owes the money to its shareholders. On this day, they also announce the date of record and payment date.
Date of record: The date of record is the date on which the company reviews and determines who the shareholders are. An investor has to be the ‘holder of record’ to be eligible to receive a dividend payout. The shareholder on or before the ex-dividend date will receive the dividend.
Ex-dividend date: Ex-dividend date is an important date for dividend investors. To be eligible for dividend payouts, an investor must purchase the shares of the company prior to the ex-dividend date.
Payment date: It is the date on which the dividend is given to the shareholders of the company.
A company’s dividend payout policy is the decision about the distribution of the company’s profits to its shareholders. A dividend payout policy of a firm is a financial decision that involves decisions on dividend payout ratio, and the frequency of dividends.
The dividend decision of a firm depends on the profits, investment opportunities in hand, availability of funds, industry trends in dividend payment, and company’s dividend payment history.
Profits: Dividend distribution happens from the profits of the company. If the company has no profits for that financial year, then the company will not be able to pay dividends.
Investment opportunities: If the firm has expansion plans that would lead to the growth of the company. Then the firm would retain back the profits to reduce the cost of funding the new projects.
Availability of funds: The availability of funds will affect firm dividend policy. If the firm has retained earnings that would fund the new project, then the firm will be able to distribute dividends despite having new projects in hand.
Industry trends in dividend payment: A company has to keep up with the industry’s dividend payment standards to survive. Else the shareholders might liquidate their shares in the company to invest in competitors companies.
Company’s dividend payment history: A company that is paying regular dividends tends to keep the dividends stable over the years. They either keep the dividend payout ratio stable or the dividend amount stable.
Following are the four types of dividends:
Cash Dividend: Cash dividend is the most popular and common form of dividend payout. The company issues a dividend to all shareholders. The company deposits the dividend money into the bank account of the shareholder as per their stock holdings.
Stock Dividend: Stock dividend payout is when the company issues additional shares to its common shareholders without any consideration. When a company issues less than 25% of the previously issued stocks, then the dividend is a stock dividend. On the contrary, when the issue is more than 25% of the last issue, it is a stock split.
Property Dividend: A company can always issue a non-monetary dividend to its shareholders. The issue of property dividend is recorded against the current market price of the asset under consideration. The market price of the asset can be either higher or lower than the book value. The company, therefore, records the transaction as either a profit or loss in their books of accounts.
Scrip Dividend: In a scenario where the company does not have enough dividend, it may pay dividends by issuing the promissory note. The promissory note that is indicating to pay dividends at a later date. Essentially, this creates note payables.
Dividends are the share of retained earnings and profits that a company pays out to its shareholders. The company either distributes the profits to the shareholders or reinvests it in the business. The frequency of dividend payout largely depends on the company. Most companies pay dividends every quarter, while some pay semi-annually or annually or do not follow a set schedule (irregular dividends).
The total value of dividends paid by a company to investors in a year is the annual dividend. In other words, the annual dividend is an indicator of per share or aggregate of dividends paid to the shareholders during a year. The annual dividend per share, divided by the share price determines the dividend yield.
The interim dividend is the dividend that a company pays during the financial year before the company’s Annual General Meeting (AGM) and releasing the financial statements. The Board of Directors declare the interim dividend and pay it out of retained earnings. Interim dividends are related to a part of the financial year, usually six months. The Board declares interim dividend only when the Articles of Association of the company permits them to. Once the company declares interim dividends, there is no debt obligation on it. Moreover, the company can cancel the interim dividend after the declaration.
The final dividend is paid after the financial results are declared. The shareholders declare the final dividend in the AGM, and the company pays it from current earnings. Final dividends relate to the full financial year and are the right of the shareholders. There need not be any explicit provision to declare final dividends. Once the company declares the final dividend, it cannot cancel it. Also, there is a debt obligation on the final dividend.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.