Wednesday, September 7, 2016

All Investors Ever Wanted to Know About Dividends

Dividend is the reward or return a company compensates to the shareholders for the money they had invested in its share capital. It is somewhat similar to the interest a borrower pays to the lender for the money lent, though in reality there is a vast difference between both.



Following table depicts the difference between the two:

Dividend vs Interest
As generally there are two broad categories of share capital, namely equity and preference, the dividend payable on these two categories is also classified into equity and preference dividend.


Preference dividend:
  1. The rate of preference dividend is specified at the time of issue. Dividend is limited to the rate specified.
  2. Even though the rate is specified it is not compulsory for the company to pay the preference dividend. It becomes payable only when it is declared.
  3. If the terms of issue so specify, the unpaid dividends may be accumulated. The shares that prescribe such accumulation are called cumulative preference shares.
  4. Even though preference dividends may be skipped, dividends cannot be paid to equity shareholders unless the preference shareholders are paid first.


Equity Dividend:
  1. The rate of equity dividend is not fixed. Equity shareholders have the right to participate in all the profits of the company after payment of preference dividend, if any.
  2. Even though equity shareholders have the right to participate in the entire profits of the company, it is usually up to the management to propose the amount of profits to be distributed as dividends. In India the private companies are generally miserly in paying dividends, with only about 15% of the net profits being distributed. On the other hand owing to a government order to boost their revenues, government companies are required to distribute 30% of their net profits as dividends.
  3. As far as equity dividend is concerned, there is no question of accumulation of past, unpaid dividends. The only way the company can remedy the situation is declaring a handsome dividend in the present to compensate for the missed dividends in the past.

Example:


Conclusion:
In summary, dividend is the recompense companies do to shareholders in return for the latter’s investment in the share capital of the companies. Dividends are the wages of investors and corporations shall never miss dividends in any year and further shall be generous in distribution of dividends.

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