Professional Documents
Culture Documents
It is t
he portion of corporate profits paid out to stockholders. When a corporation ear
ns a profit or surplus, that money can be put to two uses: it can either be re-i
nvested in the business (called retained earnings), or it can be paid to the sha
reholders as a dividend. Many corporations retain a portion of their earnings an
d pay the remainder as a dividend.
For a joint stock company, a dividend is allocated as a fixed amount per share.
Therefore, a shareholder receives a dividend in proportion to their shareholding
. For the joint stock company, paying dividends is not an expense; rather, it is
the division of an asset among shareholders. Public companies usually pay divid
ends on a fixed schedule, but may declare a dividend at any time, sometimes call
ed a special dividend to distinguish it from a regular one.
Cooperatives, on the other hand, allocate dividends according to members' activi
ty, so their dividends are often considered to be a pre-tax expense.
Dividends are usually settled on a cash basis, store credits (common among
l consumers' cooperatives) and shares in the company (either newly-created
s or existing shares bought in the market.) Further, many public companies
dividend reinvestment plans, which automatically use the cash dividend to
ase additional shares for the shareholder.
retai
share
offer
purch
even borrow money in a bad year in order to avoid cutting the dividends.
The market price is influenced by dividends through what is called the ?clientel
e? effect. That is, some investors want dividends (such as retirees and pension
funds) while others do not want dividends (wealthy individuals) but would prefer
capital gains (which are taxed at a lower rate and deferred).
Flotation costs encourage a company to retain earnings in order to minimize havi
ng to sell additional stock in the future. As we saw in the cost of capital calc
ulations, the flotation costs make new equity more expensive than retained earni
ngs.
Some companies pay no dividend. Why? Because they have good investment opportuni
ties and reinvest the earnings.