The term dividend usually refers to cash paid out of current or accumulated earnings. A dividend is redistribution from earnings and is not an expense for the company. Any direct payment by a company to shareholders may be considered as a dividend. Dividend comes in different forms.
The most common type of dividend is cash dividend. Generally, public limited companies pay regular cash dividends once a year. As the name suggests, these are cash payments made directly to shareholders, and they are made in the regular course of business. Sometimes, companies pay a regular cash dividend and an extra cash dividend. The ?extra? part may or may not be repeated in the future.
Some companies pay an extra dividend to reward shareholders if they have had a particularly good year. A special dividend is similar, but it is viewed as a truly unusual or one-time event and won?t be repeated. Interim dividend is a dividend declared by the company between two annual general meetings.
The process
Dividend is always calculated as a percentage of the face value of the shares and has nothing to do with the market value. Dividends are proposed by the board of directors and approved by shareholders, at the annual general meeting. Normally, once the dividend is declared ,it should be paid within 30 days. There are certain terms which are important in the dividend payment process.
*Dividend declaration date: This is the date on which the company announces its intention to pay dividend. As on this date, a company creates a liability in its books as proposed dividends, which means that the company owes this amount to the shareholders. On the declaration date, the company also announces the date of record and date of payment.
*Ex-dividend date: This date is two business days prior the date of record. Investors who buy the shares on, or after, the ex-dividend date would not be entitled to the upcoming dividend payment.
*Date of record: This is is the day when the list of shareholders is finalised. This list determines who receive the upcoming dividend, and it occurs two business days after the ex-dividend date.
*Payment date: This is the date on which the dividend will actually be paid to the shareholders. Normally, cash is credited into the respective shareholders? bank accounts by the company.
The company should deposit the dividend amount within five days of its declaration in to a separate bank account opened for this purpose. It means that the interim dividend will have to be deposited in a bank account within five days of the board meeting whereas the final dividend will be deposited within five days from the date of the annual general meeting.
Unpaid/unclaimed dividend
The amount of dividend that remains unpaid or unclaimed after 30 days from the date of declaration should be transferred to a special dividend account, to be called ?unpaid dividend account? of the company, within seven days from the date of expiry of the 30-day period provided for payment of dividend. Any amount in the unpaid dividend account of the company that remains unclaimed and unpaid for seven years from the date of transfer of such an amount should be transferred to the Investor Education and Protection Fund.
Payment of dividend creates confidence among shareholders. Further, consistent payment of dividend over a period of years enhances the image of the company. The company would also stand to benefit as whenever it requires additional funds for expansion or diversification or acquisition, it can very easily tap the capital markets as investors would be ready and willing to invest.
As dividend is paid in cash, it is considered one of the best rewards a company can give to its shareholders for enhancing their wealth. The shareholders also enjoy additional benefits as the dividend that they receive is tax-free. The company, too, would be liable to pay dividend distribution tax. Thus, a consistent dividend paying company is considered to be a good investment option for investors in turbulent times.
The author is an associate professor in finance and accounting at IIM Shillong