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Classification of Dividends - Dividend Policy, Business Economics & Finance Notes | Study Business Economics & Finance - B Com

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TYPES OF DIVIDENDS: Classifications of dividends are based on the form in which they are paid. Following given below are the different types of dividends: 

  •  Cash dividend 
  •  Bonus Shares referred to as stock dividend in USA 
  •  Property dividend interim dividend, annual dividend. 
  •  Special- dividend, extra dividend etc. 
  •  Regular Cash dividend 
  • Scrip dividend 
  •  Liquidating dividend 
  •  Property dividend

3.1 Cash dividend: Companies mostly pay dividends in cash. A Company should have enough cash in its bank account when cash dividends are declared. If it does not have enough bank balance, arrangement should be made to borrow funds. When the Company follows a stable dividend policy, it should prepare a cash budget for the coming period to indicate the necessary funds, which would be needed to meet the regular dividend payments of the company. It is relatively difficult to make cash planning in anticipation of dividend needs when an unstable policy is followed. 

The cash account and the reserve account of a company will be reduced when the cash dividend is paid. Thus, both the total assets and net worth of the company are reduced when the cash dividend is distributed. The market price of the share drops in most cases by the amount of the cash dividend distributed. 

3.2 Bonus Shares : (OR Stock -dividend in USA) An issue of bonus share is the distribution of shares free of cost to the existing shareholders, In India, bonus shares are issued in addition to the cash dividend and not in lieu of cash dividend. Hence, Companies in India may supplement cash dividend by bonus issues. Issuing bonus shares increases the number of outstanding shares of the company. The bonus shares are distributed proportionately to the existing shareholder. Hence there is no dilution of ownership. 

The declaration of the bonus shares will increase the paid-up Share Capital and reduce the reserves and surplus retained earnings) of the company. The total net-worth (paid up capital plus reserves and surplus) is not affected by the bonus issue. Infect, a bonus issue represents a recapitalization of reserves and surplus. It is merely an accounting transfer from reserves and surplus to paid up capital.

The following are advantages of the bonus shares to shareholders:

1) Tax benefit: One of the advantages to shareholders in the receipt of bonus shares is the beneficial treatment of such dividends with regard to income taxes. 

2) Indication of higher future profits: The issue of bonus shares is normally interpreted by shareholders as an indication of higher profitability. 

3) Future dividends may increase : if a Company has been following a policy of paying a fixed amount of dividend per share and continues it after the declaration of the bonus issue, the total cash dividend of the shareholders will increase in the future. 

4) Psychological Value: The declaration of the bonus issue may have a favorable psychological effect on shareholders. The receipt of bonus shares gives them a chance sell the shares to make capital gains without impairing their principal investment. They also associate it with the prosperity of the company 

3.3 Special dividend : In special circumstances Company declares Special dividends. Generally company declares special dividend in case of abnormal profits.

3.4 Extra- dividend: An extra dividend is an additional non-recurring dividend paid over and above the regular dividends by the company. Companies with fluctuating earnings payout additional dividends when their earnings warrant it, rather than fighting to keep a higher quantity of regular dividends. 

3.5 Annual dividend: When annually company declares and pay dividend is defined as annual dividend. 

3.6 Interim dividend During the year any time company declares a dividend, it is defined as Interim dividend. 

3.7 Regular cash dividends: Regular cash dividends are those the company exacts to maintain every year. They may be paid quarterly, monthly, semiannually or annually. 

3.8 Scrip dividends: These are promises to make the payment of dividend at a future date: Instead of paying the dividend now, the firm elects to pay it at some later date. The ‘scrip’ issued to stockholders is merely a special form of promissory note or notes payable

3.9 Liquidating dividends: These dividends are those which reduce paid-in capital: It is a pro-rata distribution of cash or property to stockholders as part of the dissolution of a business 

3.10 Property dividends: These dividends are payable in assets of the corporation other than cash. For example, a firm may distribute samples of its own product or shares in another company it owns to its stockholders.

The document Classification of Dividends - Dividend Policy, Business Economics & Finance Notes | Study Business Economics & Finance - B Com is a part of the B Com Course Business Economics & Finance.
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