What is Divided?
Dividend refers to the portion of net income paid out to shareholders. It is paid to shareholders in cash or stock for making investment and breaking risks. A company may pay full its earnings as dividends or half or not it depends on the company circumstances.
The dividend is paid when a company is in profit or surplus. When a company paid cash out of its earnings to shareholders is known as a dividend paid and remaining is known as retained earnings. A dividend is paid at a fixed price per share as stated in the decision of the company.
Advantages and Disadvantages of Dividend
Paying it, it has both effects negative and positive or advantages and disadvantages to both the company or corporation and the shareholders. Let’s clarify it, in a negative way when a company paid a dividend the retained earnings can be reduced which may reduce the internal source amount for future reinvestment, reduce the liquidity position of the corporation, limits the company’s growth as reducing the usable cash, etc. in a positive point of view when the company paid it has a reduction in profit after distribution which reduces the tax payment amount, raise morale among shareholders towards the corporation or increase the satisfaction of shareholders, etc. Similarly, when the company pays it regularly, the company seems going in profit.
Advantages and disadvantages to shareholders: from a positive point of view when shareholders get the dividends they can buy the additional investments, increase in their stability, raise in their amount of profit, increase in their satisfaction, etc. from the negative point of view when shareholders get dividend they have more amount of profit and their tax amount will go high, reducing the company’s usable cash amount if the company can not able to further investment in future similarly, can not able to profit, the shareholders also can not get the dividends, etc.
NIC Asia Bank Limited earned Rs. 172.57 million net profit in the fiscal year 2011/12. Out of this profit, it distributed Rs. 150 million to shareholders as dividend. In this example, Rs. 150 million is the dividends paid to shareholders. Sometime, companies earn profit but they might not have the cash to distribute the cash dividends. In such a situation, companies distribute stock dividends rather than cash dividends. For example, Nepal SBI Bank Limited distributed a 15% stock dividends and a 7% cash dividends. Thus, deciding on how much to pay to shareholders, and in what form to pay are an important areas of financial management as they affect shareholders’ wealth and value of the firm. The percentage of earnings in the form of cash dividends is known as the dividend payout ratio. A company may retain some portion of its earnings to finance new investment. The percentage of earnings retained in the firm is called the retention ratio.
As stated earlier, a company can distribute its earnings to its shareholders in cash or stock or both. So, basically, there are two types of dividends they are:
# Cash Dividend
The cash dividend is the most popular form of a dividend. A firm that has enough cash and does not have an expansion program in the near future prefers it. If the company declares cash dividends before the closure of the fiscal year, it is known as an interim dividend and if it declares after the completion of the fiscal year, it is known as a final dividend.
# Stock Dividend
A stock dividend also called a bonus share is another popular form of a dividend. A firm with enough profit but a weak liquidity position prefer to distribute a bonus share. Similarly, a firm which has profitable investment opportunities may declare stock dividends in lieu of cash dividends.
There are also some other forms of dividends which companies can distribute such as bond dividends, scrips, property, etc.