4 Types of Dividends You Should Know

What is a dividend?

A dividend is a payment made to investors from a portion of a company’s profits. They are quoted as dividends per share because each single company share receives the stipulated dividend amount. The board of directors is the one that agrees to pay dividends after a certain period, like six months or 12 months. We will discuss four types of dividends in this article.

What are the common types of dividends?

Investors in the U.S.A may place dividends in two broad categories, qualified and nonqualified dividends. But, these classifications are for tax purposes in the U.S.A and do not apply to the rest of the world.

Therefore, investors should know about the types of dividends that apply to the rest of the world, as described below. Dividend types are based on how the dividends are paid to shareholders.

1. Cash dividends

The cash dividend is the most common dividend type. It is paid in cash for each share, for example, 2 cents per share. Investors who own the stock or shares at a certain date will be entitled to the cash dividend. This date is called the date of record.

Shareholders have the option to reinvest their dividends into the company in exchange for more shares. Investors with a long-term view usually opt for this option while others, for example, retirees, use dividend payouts to fund their daily needs.

2. Stock dividends

A stock dividend may be issued when a company wants to reward its investors with more shares. A company gives stock dividends on a percentage basis. For example, a 10% stock dividend means that each shareholder receives 10 shares for 100 shares held.

A stock dividend must not be confused with a stock split. The former sees investors receiving new, additional shares from the company while the latter sees existing shares being split using an agreed ratio, for example, 4 to 1 (1 share held receives 4 additional shares).

However, the two have the same effect. They increase the number of shares in issue. The price of the shares will also be affected by the increase in the shares in issue.

3. Property dividends

Investors may receive property as a dividend from a company. This property should be recorded at a fair market value when the property dividend is declared. Property prices vary from the time of purchase to when the dividend is issued. As such, the company must calculate the gain or loss from the property and record that amount in their books.

4. Scrip dividends

These dividend types are also called liability dividends. They are a liability to the company because they are in the form of certificates given to shareholders. These certificates allow shareholders to choose to be paid their dividends later in cash or get shares.

For example, company A declares a $1 dividend. Its share price is $5, and you own 200 shares. Based on its scrip dividend, you can choose between these two options:

  1. $1 x 200 shares = $200 to be received in cash. Or,
  2. $200/$5 = 40 additional shares of company A.

If you choose option 1, you will receive your cash at a later date. But if you select option 2, the company will automatically reinvest your dividends in exchange for more shares, 40 in our example.

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