A dividend is a payment made to shareholders that is proportional to the number of shares owned. It is authorized by the board of directors. Dividends are usually issued by companies that will not reap significant growth by reinvesting profits, and so instead choose to return funds to shareholders in the form of a dividend. Companies may also issue dividends in order to attract income investors, who are looking for a steady source of income, and which can be reliable long-term holders of company shares.
There are a number of types of dividends that can be issued, including the following:
- Cash dividend. This is the most common form of dividend, paid solely in cash.
- Stock dividend. This is the issuance of additional shares to investors. Despite the appearance of handing out something of value, a stock dividend merely increases the number of shares held by the same investors, and so does not constitute a transfer of value.
- Property dividend. This is a payment in the form of a non-cash asset, such as the products that a company manufactures.
- Scrip dividend. This is a promise to pay investors a cash dividend at a later date, and so is essentially a promissory note.
- Liquidating dividend. This is a dividend issued when the board of directors intends to liquidate a business and return all remaining net assets to investors in the form of cash. There may be more than one liquidating dividend.
Some organizations avoid issuing dividends, on the grounds that they pay taxes on income and then shareholders pay taxes on the dividends received, which is double taxation of the same income.