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:
- The rate of preference dividend is
specified at the time of issue. Dividend is limited to the rate specified.
- 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.
- If the terms of issue so specify, the
unpaid dividends may be accumulated. The shares that prescribe such
accumulation are called cumulative
preference shares.
- Even though preference dividends may be
skipped, dividends cannot be paid to equity shareholders unless the preference
shareholders are paid first.
Equity
Dividend:
- 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.
- 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.
- 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.
