project on dividend policy

7/29/2019 Project on Dividend Policy

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Dividend policy is concerned with financial policies regarding payingcash dividendin the

present or paying an increased dividend at a later stage. Whether to issue dividends, and what

amount, is determined mainly on the basis of the company's unappropriated profit (excess cash)

and influenced by the company's long-term earning power. When cash surplus exists and is not

needed by the firm, then management is expected to pay out some or all of those surplus earningsin the form of cash dividends or to repurchase the company's stock through a share buyback

program.

If there are no NPV positive opportunities, i.e. projects wherereturnsexceed the hurdle rate, and

excess cash surplus is not needed, thenfinance theory suggestsmanagement should return

some or all of the excess cash to shareholders as dividends. This is the general case, however

there are exceptions. For example, shareholders of a "growth stock", expect that the company

will, almost by definition, retain most of the excess earnings so as to fund future growth

internally. By withholding current dividend payments to shareholders, managers of growth

companies are hoping that dividend payments will be increased proportionality higher in thefuture, to offset the retainment of current earnings and the internal financing of present

investment projects.

Management must also choose theform of the dividend distribution, generally as

cashdividendsor via ashare buyback. Various factors may be taken into consideration: where

shareholders must paytax on dividends, firms may elect to retain earnings or to perform a stock

buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies

will pay "dividends" fromstockrather than in cash; seeCorporate action. Financial theory

suggests that the dividend policy should be set based upon the type of company and what

management determines is the best use of those dividend resources for the firm to its

shareholders. As a general rule, shareholders of growth companies would prefer managers to

have a share buyback program, whereas shareholders of value or secondary stocks would prefer

the management of these companies to payout surplus earnings in the form of cash dividends.

Coming up with a dividend policy is challenging for the directors and financial manager a

company, because differentinvestorshave different views on present cash dividends and

futurecapital gains. Another confusion that pops up is regarding the extent of effect of dividends
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on theshare price. Due to this controversial nature of a dividend policy it is often called

thedividend puzzle.

Various models have been developed to help firms analyse and evaluate the perfect dividend

policy. There is no agreement between these schools of thought over the relationship between

dividends and the value of the share or the wealth of the shareholders in other words.

One school consists of people like James E. Walter andMyron J. Gordon(seeGordon model),

who believe that current cash dividends are less risky than future capital gains. Thus, they say

that investors prefer those firms which pay regular dividends and such dividends affect the

market price of the share. Another school linked toModigliani and Millerholds that investors

don't really choose between future gains and cash dividends.[1]

Relevance of dividend policy[edit source]

Dividends paid by the firms are viewed positively both by the investors and the firms. The firms

which do not pay dividends are rated in oppositely by investors thus affecting the share price.The people who support relevance of dividends clearly state that regular dividends reduce

uncertainty of the shareholders i.e. the earnings of the firm is discounted at a lower rate,

ke thereby increasing the market value. However, its exactly opposite in the case of increased

uncertainty due to non-payment of dividends.

Two important models supporting dividend relevance are given by Walter and Gordon.

Walter's model[edit source]

Walter's model shows the relevance of dividend policy and its bearing on the value of the share.

Assumptions of the Walter model[edit source]

1. Retained earnings are the only source of financing investments in the firm, there is no

external finance involved.

2. The cost of capital, ke and the rate of return on investment, r are constant i.e. even if new

investments decisions are taken, the risks of the business remains same.

3. The firm's life is endless i.e. there is no closing down.

Basically, the firm's decision to give or not give out dividends depends on whether it has enough

opportunities to invest the retain earnings i.e. a strong relationship between investment and

dividend decisions is considered.

Model description[edit source]

Dividends paid to the shareholders are reinvested by the shareholder further, to get higher

returns. This is referred to as the opportunity cost of the firm or the cost of capital, ke for the

firm. Another situation where the firms do not pay out dividends, is when they invest the profits

or retained earnings in profitable opportunities to earn returns on such investments. This rate of

return r, for the firm must at least be equal to ke. If this happens then the returns of the firm is
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equal to the earnings of the shareholders if the dividends were paid. Thus, it's clear that if r, is

more than the cost of capital ke, then the returns from investments is more than returns

shareholders receive from further investments.

Walter's model says that if rke then the investmentopportunities reap better returns for the firm and thus, the firm should invest the retained

earnings. The relationship between r and k are extremely important to determine the dividend

policy. It decides whether the firm should have zero payout or 100% payout.

In a nutshell :

If r>ke, the firm should have zero payout and make investments.

If r


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1. The assumption of no external financing apart from retained earnings, for the firm make

further investments is not really followed in the real world.

2. The constant r and ke are seldom found in real life, because as and when a firm invests

more the business risks change.

Gordon's Model[edit source]Main article:Gordon model

Myron J. Gordon

Myron J. Gordonhas also supported dividend relevance and believes in regular dividends

affecting the share price of the firm.[2]

The Assumptions of the Gordon model[edit source]

Gordon's assumptions are similar to the ones given by Walter. However, there are two additional

assumptions proposed by him :

1. The product of retention ratio b and the rate of return r gives us the growth rate of the

firm g.

2. The cost of capital ke, is not only constant but greater than the growth rate i.e. ke>g.

Model description[edit source]

Investor's are risk averse and believe that incomes from dividends are certain rather than incomes

from future capital gains, therefore they predict future capital gains to be risky propositions.

They discount the future capital gains at a higher rate than the firm's earnings thereby, evaluatinga higher value of the share. In short, when retention rate increases, they require a higher

discounting rate. Gordon has given a model similar to Walter's where he has given a

mathematical formula to determine price of the share.

Mathematical representation[edit source]

The market prices of the share is calculated as follows:
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where,

P = Market price of the share

E = Earnings per share

b = Retention ratio (1 - payout ratio)

r = Rate of return on the firm's investments

ke = Cost of equity

br = Growth rate of the firm (g)

Therefore the model shows a relationship between the payout ratio, rate of return, cost of capital

and the market price of the share.

Conclusions on the Walter and Gordon Model[edit source]

Gordon's ideas were similar to Walter's and therefore, the criticisms are also similar. Both of

them clearly state the relationship between dividend policies and market value of the firm.

Capital structure substitution theory & dividends[edit source]

Thecapital structure substitution theory(CSS)[3]

describes the relationship between earnings,

stock price andcapital structureof public companies. The theory is based on one simple

hypothesis: company managements manipulate capital structure such that earnings-per-share

(EPS) are maximized. The resulting dynamic debt-equity target explains why some companies

use dividends and others do not. When redistributing cash to shareholders, company

managements can typically choose between dividends andshare repurchases. But as dividends

are in most cases taxed higher than capital gains, investors are expected to prefer capital gains.

However, the CSS theory shows that for some companies share repurchases lead to a reduction

in EPS. These companies typically prefer dividends over share repurchases.

Mathematical representation[edit source]

From the CSS theory it can be derived that debt-free companies should prefer repurchases

whereas companies with a debt-equity ratio larger than

should prefer dividends as a means to distribute cash toshareholders, where

D is the companys total long term debt
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is the companys total equity

is the tax rate on capital gains

is the tax rate on dividends

Low valued, high leverage companies with limited investment opportunities and a high

profitability use dividends as the preferred means to distribute cash to shareholders, as isdocumented by empirical research.

[4]

Conclusion[edit source]

The CSS theory provides more guidance on dividend policy to company managements than the

Walter model and the Gordon model. It also reverses the traditional order of cause and effect by

implying that company valuation ratios drive dividend policy, and not vice-versa. The CSS

theory does not have 'invisible' or 'hidden' parameters such as theequity risk premium, the

discount rate, the expected growth rate or expected inflation. As a consequence the theory can be

tested in an unambiguous way.

Irrelevance of dividend policy[edit source]

Franco Modigliani
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Merton Miller

TheModiglianiandMillerschool of thought believes that investors do not state any preference

between current dividends and capital gains. They say that dividend policy is irrelevant and is

not deterministic of the market value. Therefore, the shareholders are indifferent between the two

types of dividends. All they want are high returns either in the form of dividends or in the form

of re-investment of retained earnings by the firm. There are two conditions discussed in relation

to this approach :

decisions regarding financing and investments are made and do not change with respect to

the amounts of dividends received. when an investor buys and sells shares without facing any transaction costs and firms issue

shares without facing any floatation cost, it is termed as a perfect capital market.[5]

Two important theories discussed relating to the irrelevance approach, the residuals theory and

the Modigliani and Miller approach.

Residuals theory of dividends[edit source]

One of the assumptions of this theory is that external financing to re-invest is either not

available, or that it is too costly to invest in any profitable opportunity. If the firm has good

investment opportunity available then, they'll invest the retained earnings and reduce the

dividends or give no dividends at all. If no such opportunity exists, the firm will pay out

dividends.

If a firm has to issue securities to finance an investment, the existence of floatation costs needs a

larger amount of securities to be issued. Therefore, the pay out of dividends depend on whether

any profits are left after the financing of proposed investments as floatation costs increases the

amount of profits used. Deciding how much dividends to be paid is not the concern here, in fact
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the firm has to decide how much profits to be retained and the rest can then be distributed as

dividends. This is the theory of Residuals, where dividends are residuals from the profits after

serving proposed investments.[6]

This residual decision is distributed in three steps:

evaluating the available investment opportunities to determine capital expenditures.

evaluating the amount of equity finance that would be needed for the investment, basically

having an optimum finance mix.

cost of retained earnings


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4. Securities can be split into any parts i.e. they are divisible

5.No taxes and floatation costs.

6. The investment decisions are taken firmly and the profits are therefore known with

certainty. The dividend policy does not affect these decisions.

Model description[edit source]The dividend irrelevancy in this model exists because shareholders are indifferent between

paying out dividends and investing retained earnings in new opportunities. The firm finances

opportunities either through retained earnings or by issuing new shares to raise capital. The

amount used up in paying out dividends is replaced by the new capital raised through issuing

shares. This will affect the value of the firm in an opposite way. The increase in the value

because of the dividends will be offset by the decrease in the value for new capital raising.

See also[edit source]

Clientele effectExternal links[edit source]

Dividend Policyby Alex Tajirian

Corporate Dividend Policyby Henry Servaes (London Business School) and Peter Tufano

(Harvard Business School)

References[edit source]

1. ^Rustagi, Dr.R.P.Financial Management. Taxmann Publications (P.) Ltd.ISBN978-

81-7194-786-7.

2. ^Vinod Kothari."Dividend Policy". Retrieved 2011-10-14.

3. ^Timmer, Jan (2011).Understanding the Fed Model, Capital Structure, and then Some.

4. ^Fama, E.F.; French, K.R. (April 2001)."Disappearing Dividends: Changing Firm

Characteristics or Lower Propensity to Pay".Journal of Financial Economics60: 343.

5. ^Dividend Policy, Robert H. Smith School of Business.

6. ^Sumon S P Lee,Dividend Policy, The Chinese University of Hong Kong.

7. ^CA Magni,Relevance or irrelevance of retention for dividend policy irrelevance
http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=22http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=22http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=22http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=23http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=23http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=23http://en.wikipedia.org/wiki/Clientele_effecthttp://en.wikipedia.org/wiki/Clientele_effecthttp://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=24http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=24http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=24http://www.morevalue.com/i-reader/ftp/Ch17.PDFhttp://www.morevalue.com/i-reader/ftp/Ch17.PDFhttp://faculty.london.edu/hservaes/Corporate%20Dividend%20Policy%20-%20Full%20Paper.pdfhttp://faculty.london.edu/hservaes/Corporate%20Dividend%20Policy%20-%20Full%20Paper.pdfhttp://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=25http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=25http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=25http://en.wikipedia.org/wiki/Dividend_policy#cite_ref-1http://en.wikipedia.org/wiki/Dividend_policy#cite_ref-1http://en.wikipedia.org/wiki/International_Standard_Book_Numberhttp://en.wikipedia.org/wiki/International_Standard_Book_Numberhttp://en.wikipedia.org/wiki/Special:BookSources/978-81-7194-786-7http://en.wikipedia.org/wiki/Special:BookSources/978-81-7194-786-7http://en.wikipedia.org/wiki/Special:BookSources/978-81-7194-786-7http://en.wikipedia.org/wiki/Special:BookSources/978-81-7194-786-7http://en.wikipedia.org/wiki/Dividend_policy#cite_ref-VinodKothari_Policy_2-0http://en.wikipedia.org/wiki/Dividend_policy#cite_ref-VinodKothari_Policy_2-0http://www.vinodkothari.com/tutorials/dividend%20policy.pdfhttp://www.vinodkothari.com/tutorials/dividend%20policy.pdfhttp://www.vinodkothari.com/tutorials/dividend%20policy.pdfhttp://en.wikipedia.org/wiki/Dividend_policy#cite_ref-3http://en.wikipedia.org/wiki/Dividend_policy#cite_ref-3http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1322703http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1322703http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1322703http://en.wikipedia.org/wiki/Dividend_policy#cite_ref-4http://en.wikipedia.org/wiki/Dividend_policy#cite_ref-4http://papers.ssrn.com/sol3/papers.cfm?abstract_id=203092#PaperDownloadhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=203092#PaperDownloadhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=203092#PaperDownloadhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=203092#PaperDownloadhttp://en.wikipedia.org/wiki/Dividend_policy#cite_ref-5http://www.rhsmith.umd.edu/faculty/gphillips/courses/bmgt640/dividend.pdfhttp://www.rhsmith.umd.edu/faculty/gphillips/courses/bmgt640/dividend.pdfhttp://www.rhsmith.umd.edu/faculty/gphillips/courses/bmgt640/dividend.pdfhttp://en.wikipedia.org/wiki/Dividend_policy#cite_ref-6http://en.wikipedia.org/wiki/Dividend_policy#cite_ref-6http://202.130.104.213/images/uploads/articles/Dividend.pdfhttp://202.130.104.213/images/uploads/articles/Dividend.pdfhttp://202.130.104.213/images/uploads/articles/Dividend.pdfhttp://en.wikipedia.org/wiki/Dividend_policy#cite_ref-7http://en.wikipedia.org/wiki/Dividend_policy#cite_ref-7http://berkeleymath.com/Documents/dividend_irrelevance.pdfhttp://berkeleymath.com/Documents/dividend_irrelevance.pdfhttp://berkeleymath.com/Documents/dividend_irrelevance.pdfhttp://berkeleymath.com/Documents/dividend_irrelevance.pdfhttp://en.wikipedia.org/wiki/Dividend_policy#cite_ref-7http://202.130.104.213/images/uploads/articles/Dividend.pdfhttp://en.wikipedia.org/wiki/Dividend_policy#cite_ref-6http://www.rhsmith.umd.edu/faculty/gphillips/courses/bmgt640/dividend.pdfhttp://en.wikipedia.org/wiki/Dividend_policy#cite_ref-5http://papers.ssrn.com/sol3/papers.cfm?abstract_id=203092#PaperDownloadhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=203092#PaperDownloadhttp://en.wikipedia.org/wiki/Dividend_policy#cite_ref-4http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1322703http://en.wikipedia.org/wiki/Dividend_policy#cite_ref-3http://www.vinodkothari.com/tutorials/dividend%20policy.pdfhttp://en.wikipedia.org/wiki/Dividend_policy#cite_ref-VinodKothari_Policy_2-0http://en.wikipedia.org/wiki/Special:BookSources/978-81-7194-786-7http://en.wikipedia.org/wiki/Special:BookSources/978-81-7194-786-7http://en.wikipedia.org/wiki/International_Standard_Book_Numberhttp://en.wikipedia.org/wiki/Dividend_policy#cite_ref-1http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=25http://faculty.london.edu/hservaes/Corporate%20Dividend%20Policy%20-%20Full%20Paper.pdfhttp://www.morevalue.com/i-reader/ftp/Ch17.PDFhttp://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=24http://en.wikipedia.org/wiki/Clientele_effecthttp://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=23http://en.wikipedia.org/w/index.php?title=Dividend_policy&action=edit&section=22


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A dividend is a payment made by acorporationto itsshareholders, usually as a distribution

ofprofits.[1]When a corporation earns a profit or surplus, it can either re-invest it in the business

(calledretained earnings), or it can distribute it to shareholders. A corporation may retain a

portion of its earnings and pay the remainder as a dividend. Distribution to shareholders can be

in cash (usually a deposit into a bank account) or, if the corporation has adividend reinvestment

plan, the amount can be paid by the issue of further shares orshare repurchase.[2][3]

A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in

proportion to their shareholding. For the joint stock company, paying dividends is not

anexpense; rather, it is the division of after tax profits among shareholders. Retained earnings

(profits that have not been distributed as dividends) are shown in the shareholder equity section

in the company's balance sheet - the same as its issued share capital.Public companiesusually

pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called

aspecial dividendto distinguish it from the fixed schedule dividends.Cooperatives, on the otherhand, allocate dividends according to members' activity, so their dividends are often considered

to be a pre-tax expense.

The word "dividend" comes from theLatinword "dividendum" ("thing to be divided").[4]

Contents

[hide]

1 Forms of payment

2 Reliability of dividends

3 Dividend dates

4 Dividend-reinvestment

5 Dividend taxation

o 5.1 Australia and New Zealand

o 5.2 UK

o 5.3 India

o 5.4 Effect on stock price

o 5.5 Criticism

6 Other corporate entities

o 6.1 Cooperatives

o 6.2 Trusts

o 6.3 Mutuals

7 See also
http://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Profit_(accounting)http://en.wikipedia.org/wiki/Profit_(accounting)http://en.wikipedia.org/wiki/Dividend#cite_note-1http://en.wikipedia.org/wiki/Dividend#cite_note-1http://en.wikipedia.org/wiki/Dividend#cite_note-1http://en.wikipedia.org/wiki/Retained_earningshttp://en.wikipedia.org/wiki/Retained_earningshttp://en.wikipedia.org/wiki/Retained_earningshttp://en.wikipedia.org/wiki/Dividend_reinvestment_planhttp://en.wikipedia.org/wiki/Dividend_reinvestment_planhttp://en.wikipedia.org/wiki/Dividend_reinvestment_planhttp://en.wikipedia.org/wiki/Dividend_reinvestment_planhttp://en.wikipedia.org/wiki/Share_repurchasehttp://en.wikipedia.org/wiki/Share_repurchasehttp://en.wikipedia.org/wiki/Dividend#cite_note-Simkovic_Disclose-2http://en.wikipedia.org/wiki/Dividend#cite_note-Simkovic_Disclose-2http://en.wikipedia.org/wiki/Dividend#cite_note-Simkovic_Disclose-2http://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Special_dividendhttp://en.wikipedia.org/wiki/Special_dividendhttp://en.wikipedia.org/wiki/Special_dividendhttp://en.wikipedia.org/wiki/Cooperativehttp://en.wikipedia.org/wiki/Cooperativehttp://en.wikipedia.org/wiki/Cooperativehttp://en.wikipedia.org/wiki/Latin_languagehttp://en.wikipedia.org/wiki/Latin_languagehttp://en.wikipedia.org/wiki/Latin_languagehttp://en.wikipedia.org/wiki/Dividend#cite_note-4http://en.wikipedia.org/wiki/Dividend#cite_note-4http://en.wikipedia.org/wiki/Dividend#cite_note-4http://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Dividend#Forms_of_paymenthttp://en.wikipedia.org/wiki/Dividend#Forms_of_paymenthttp://en.wikipedia.org/wiki/Dividend#Reliability_of_dividendshttp://en.wikipedia.org/wiki/Dividend#Reliability_of_dividendshttp://en.wikipedia.org/wiki/Dividend#Dividend_dateshttp://en.wikipedia.org/wiki/Dividend#Dividend_dateshttp://en.wikipedia.org/wiki/Dividend#Dividend-reinvestmenthttp://en.wikipedia.org/wiki/Dividend#Dividend-reinvestmenthttp://en.wikipedia.org/wiki/Dividend#Dividend_taxationhttp://en.wikipedia.org/wiki/Dividend#Dividend_taxationhttp://en.wikipedia.org/wiki/Dividend#Australia_and_New_Zealandhttp://en.wikipedia.org/wiki/Dividend#Australia_and_New_Zealandhttp://en.wikipedia.org/wiki/Dividend#UKhttp://en.wikipedia.org/wiki/Dividend#UKhttp://en.wikipedia.org/wiki/Dividend#Indiahttp://en.wikipedia.org/wiki/Dividend#Indiahttp://en.wikipedia.org/wiki/Dividend#Effect_on_stock_pricehttp://en.wikipedia.org/wiki/Dividend#Effect_on_stock_pricehttp://en.wikipedia.org/wiki/Dividend#Criticismhttp://en.wikipedia.org/wiki/Dividend#Criticismhttp://en.wikipedia.org/wiki/Dividend#Other_corporate_entitieshttp://en.wikipedia.org/wiki/Dividend#Other_corporate_entitieshttp://en.wikipedia.org/wiki/Dividend#Cooperativeshttp://en.wikipedia.org/wiki/Dividend#Cooperativeshttp://en.wikipedia.org/wiki/Dividend#Trustshttp://en.wikipedia.org/wiki/Dividend#Trustshttp://en.wikipedia.org/wiki/Dividend#Mutualshttp://en.wikipedia.org/wiki/Dividend#Mutualshttp://en.wikipedia.org/wiki/Dividend#See_alsohttp://en.wikipedia.org/wiki/Dividend#See_alsohttp://en.wikipedia.org/wiki/Dividend#See_alsohttp://en.wikipedia.org/wiki/Dividend#Mutualshttp://en.wikipedia.org/wiki/Dividend#Trustshttp://en.wikipedia.org/wiki/Dividend#Cooperativeshttp://en.wikipedia.org/wiki/Dividend#Other_corporate_entitieshttp://en.wikipedia.org/wiki/Dividend#Criticismhttp://en.wikipedia.org/wiki/Dividend#Effect_on_stock_pricehttp://en.wikipedia.org/wiki/Dividend#Indiahttp://en.wikipedia.org/wiki/Dividend#UKhttp://en.wikipedia.org/wiki/Dividend#Australia_and_New_Zealandhttp://en.wikipedia.org/wiki/Dividend#Dividend_taxationhttp://en.wikipedia.org/wiki/Dividend#Dividend-reinvestmenthttp://en.wikipedia.org/wiki/Dividend#Dividend_dateshttp://en.wikipedia.org/wiki/Dividend#Reliability_of_dividendshttp://en.wikipedia.org/wiki/Dividend#Forms_of_paymenthttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Dividend#cite_note-4http://en.wikipedia.org/wiki/Latin_languagehttp://en.wikipedia.org/wiki/Cooperativehttp://en.wikipedia.org/wiki/Special_dividendhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Dividend#cite_note-Simkovic_Disclose-2http://en.wikipedia.org/wiki/Dividend#cite_note-Simkovic_Disclose-2http://en.wikipedia.org/wiki/Share_repurchasehttp://en.wikipedia.org/wiki/Dividend_reinvestment_planhttp://en.wikipedia.org/wiki/Dividend_reinvestment_planhttp://en.wikipedia.org/wiki/Retained_earningshttp://en.wikipedia.org/wiki/Dividend#cite_note-1http://en.wikipedia.org/wiki/Profit_(accounting)http://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Corporation


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8 References

9 External links

Forms of payment[edit source]

Cash dividends are the most common form of payment and are paid out in currency, usuallyviaelectronic funds transferor a printed papercheck. Such dividends are a form of investment

income and are usually taxable to the recipient in the year they are paid. This is the most

common method of sharing corporate profits with the shareholders of the company. For each

share owned, a declared amount of money is distributed. Thus, if a person owns 100 shares

and the cash dividend is GBP 0.50 per share, the holder of the stock will be paid GBP 50.

Dividends paid are not classified as anexpense, but rather a deduction ofretained earnings.

Dividends paid does not show up on anIncome Statementbut does appear on theBalance

Sheet.

Stock or scrip dividends are those paid out in the form of additional stock shares of the

issuing corporation, or another corporation (such as its subsidiary corporation). They are usually

issued in proportion to shares owned (for example, for every 100 shares of stock owned, a 5%

stock dividend will yield 5 extra shares).

Nothing tangible will be gained if the stock issplitbecause the total number of shares increases,

lowering the price of each share, without changing themarket capitalization, or total value, of

the shares held. (See alsoStock dilution.)

Stock dividend distributions are issues of new shares made to limited partners by a

partnership in the form of additional shares. Nothing is split, these shares increase the market

capitalization and total value of the company at the same time reducing the original cost basisper share.

Stock dividends are not includable in the gross income of the shareholder for US income tax

purposes. Because the shares are issued for proceeds equal to the pre-existing market price of

the shares; there is no negative dilution in the amount recoverable.[5][6][7]

Property dividends or dividends in specie(Latinfor"in kind") are those paid out in the form of

assets from the issuing corporation or another corporation, such as a subsidiary corporation.

They are relatively rare and most frequently are securities of other companies owned by the

issuer, however they can take other forms, such as products and services.

Interim dividends are dividend payments made before a company's Annual General Meeting

(AGM) and final financial statements. This declared dividend usually accompanies the

company's interim financial statements.

Other dividends can be used instructured finance. Financial assets with a known market value

can be distributed as dividends; warrants are sometimes distributed in this way. For large

companies with subsidiaries, dividends can take the form of shares in a subsidiary company. A
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common technique for "spinning off" a company from its parent is to distribute shares in the new

company to the old company's shareholders. The new shares can then be traded

independently.

Reliability of dividends[edit source]

Two metrics are commonly used to examine a firm's dividend policy.

Payout ratio is calculated by dividing the company's dividend by theearnings per share. A

payout ratio greater than 1 means the company is paying out more in dividends for the year

than it earned.

Dividend coveris calculated by dividing the company'scash flow from operationsby the

dividend. This ratio is apparently popular with analysts ofincome trustsin Canada.[citation

needed] Dividends are payments made by a corporation to its shareholder members. It is the

portion of corporate profits paid out to stockholders.

Dividend dates[edit source]

Any dividend that is declared must be approved by a company'sBoard of Directorsbefore it is

paid. Forpublic companies, there are four important dates to remember regarding dividends.

These are discussed in detail with examples at the Securities and Exchange Commission

site[4]

Declaration date is the day the Board of Directors announces its intention to pay a dividend.

On this day, aliabilityis created and the company records that liability on its books; it now owes

the money to the stockholders. On the declaration date, the Board will also announce a date of

record and a payment date.

In-dividend date is the last day, which is one trading day before the ex-dividend date, where

the stock is said to be cum dividend('with [including] dividend'). In other words, existing holders

of the stock and anyone who buys it on this day will receive the dividend, whereas any holders

selling the stock lose their right to the dividend. After this date the stock becomes ex dividend.

Ex-dividend date(typically 2 trading days before the record date for U.S. securities) is the day

on which all shares bought and sold no longer come attached with the right to be paid the most

recently declared dividend. This is an important date for any company that has many

stockholders, including those that trade on exchanges, as it makes reconciliation of who is to be

paid the dividend easier. Existing holders of the stock will receive the dividend even if they now

sell the stock, whereas anyone who now buys the stock will not receive the dividend. It is

relatively common for a stock's price to decrease on the ex-dividend date by an amount roughly

equal to the dividend paid. This reflects the decrease in the company's assets resulting from the

declaration of the dividend. The company does not take any explicit action to adjust its stock

price; in an efficient market, buyers and sellers will automatically price this in.
http://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=2http://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=2http://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=2http://en.wikipedia.org/wiki/Earnings_per_sharehttp://en.wikipedia.org/wiki/Earnings_per_sharehttp://en.wikipedia.org/wiki/Earnings_per_sharehttp://en.wikipedia.org/wiki/Cash_flow_statementhttp://en.wikipedia.org/wiki/Cash_flow_statementhttp://en.wikipedia.org/wiki/Cash_flow_statementhttp://en.wikipedia.org/wiki/Income_trusthttp://en.wikipedia.org/wiki/Income_trusthttp://en.wikipedia.org/wiki/Income_trusthttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=3http://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=3http://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=3http://en.wikipedia.org/wiki/Board_of_Directorshttp://en.wikipedia.org/wiki/Board_of_Directorshttp://en.wikipedia.org/wiki/Board_of_Directorshttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Public_companyhttp://www.sec.gov/answers/dividen.htmhttp://www.sec.gov/answers/dividen.htmhttp://www.sec.gov/answers/dividen.htmhttp://en.wikipedia.org/wiki/Liability_(financial_accounting)http://en.wikipedia.org/wiki/Liability_(financial_accounting)http://en.wikipedia.org/wiki/Liability_(financial_accounting)http://en.wikipedia.org/wiki/Ex-dividend_datehttp://en.wikipedia.org/wiki/Ex-dividend_datehttp://en.wikipedia.org/wiki/Ex-dividend_datehttp://en.wikipedia.org/wiki/Liability_(financial_accounting)http://www.sec.gov/answers/dividen.htmhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Board_of_Directorshttp://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=3http://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Income_trusthttp://en.wikipedia.org/wiki/Cash_flow_statementhttp://en.wikipedia.org/wiki/Earnings_per_sharehttp://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=2


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Book closure DateWhenever a company announces a dividend pay-out, it also announces a

date on which the company will ideally temporarily close its books for fresh transfers of stock.

Record date Shareholders registered in thestockholders of recordon or before the date of

record will receive the dividend. Shareholders who are not registered as of this date will not

receive the dividend. Registration in most countries is essentially automatic for sharespurchased before the ex-dividend date.

Payment date is the day when the dividend cheques will actually be mailed to the shareholders

of a company or credited to brokerage accounts.

Dividend-reinvestment[edit source]

Some companies havedividend reinvestment plans, or DRIPs, not to be confused with scrips.

DRIPs allow shareholders to use dividends to systematically buy small amounts of stock,

usually with no commission and sometimes at a slight discount. In some cases, the shareholder

might not need to pay taxes on these re-invested dividends, but in most cases they do.

Dividend taxation[edit source]

In many countries, such as theU.S.A.andCanada, income fromdividends is taxed, albeit at a

lower rate than ordinary income. Though in most cases, the lower tax rate is due to profits being

taxed initially as Corporate tax.

Australia and New Zealand[edit source]

InAustraliaandNew Zealand, companies also forwardfranking creditsorimputation creditsto

shareholders along with dividends. These franking credits represent the tax paid by the

company upon its pre-tax profits. One dollar of company tax paid generates one franking credit.

Companies can forward any proportion of franking up to a maximum amount that is calculated

from the prevailing company tax rate: for each dollar of dividend paid, the maximum level of

franking is the company tax rate divided by (1 - company tax rate). At the current 30% rate, this

works out at 0.30 of a credit per 70 cents of dividend, or 42.857 cents per dollar of dividend. The

shareholders who are able to use them offset these credits against their income tax bills at a

rate of a dollar per credit, thereby effectively eliminating thedouble taxationof company profits.

This system is calleddividend imputation.

UK[edit source]

The UK's taxation system operates along similar lines toAustraliaandNew Zealand: when a

shareholder receives a dividend, the basic rate of income tax is deemed to already have been

paid on that dividend. This ensures that double taxation does not take place, however this

creates difficulties for some non-taxpaying entities such as certain trusts, charities and pension

funds which are not allowed to reclaim the deemed tax payment and thus are in effect taxed on

their income.
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India[edit source]

In India, companies declaring or distributing dividend, are required to pay a Corporate Dividend

Tax in addition to the tax levied on their income. Dividend received is exempt in the hands of the

shareholder's, in respect of which Corporate Dividend Tax has been paid by the company.

Effect on stock price[edit source]

After a stock goes ex-dividend (i.e.. the financial obligation for the company to pay the dividend

to the holder), the stock price should drop.

To calculate the amount of the drop, the traditional method is to view the financial effects of the

dividend from the perspective of the company. Since the company has paid say x in dividends

per share out of its cash account on the left hand side of the balance sheet, the equity account

on the right side should decrease an equivalent amount. This means that a x dividend should

result in a x drop in the share price.

A more accurate method of calculating this price is to look at the share price and dividend fromthe after-tax perspective of a share holder. The after-tax drop in the share price (or capital

gain/loss) should be equivalent to the after-tax dividend. For example, if the tax of capital gains

Tcg is 35%, and the tax on dividends Td is 15%, then a 1 dividend is equivalent to 0.85 of

after tax money. To get the same financial benefit from a capital loss, the after tax capital loss

value should equal 0.85. The pre-tax capital loss would be 0.85/(1-Tcg) = 0.85/(1-35%) =

0.85/65% = 1.30. In this case, a dividend of 1 has led to a larger drop in the share price of

1.30, because the tax rate on capital losses is higher than the dividend tax rate.

Finally, security analysis that does not take dividends into account may mute the decline in

share price, for example in the case of aPriceearnings ratiotarget that does not back out cash;or amplify the decline, for example in the case ofTrend following.

Criticism[edit source]

Some believe that company profits are best re-invested back into the company: research and

development, capital investment, expansion, etc. Proponents of this view (and thus critics of

dividends per se) suggest that an eagerness to return profits to shareholders may indicate the

management having run out of good ideas for the future of the company. Some studies,

however, have demonstrated that companies that pay dividends have higher earnings growth,

suggesting that dividend payments may be evidence of confidence in earnings growth and

sufficient profitability to fund future expansion.[8]

Taxation of dividends is often used as justification for retaining earnings, or for performing

astock buyback, in which the company buys back stock, thereby increasing the value of the

stock left outstanding.

When dividends are paid, individual shareholders in many countries suffer fromdouble

taxationof those dividends:
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1. the company pays income tax to the government when it earns any income, and then

2. when the dividend is paid, the individual shareholder pays income tax on the dividend

payment.

In many countries, the tax rate on dividend income is lower than for other forms of income to

compensate for tax paid at the corporate level.

Capital gains should not be confused with dividends. Capital gains assume an increase in a

stock's value. Dividend is merely parsing out a share of the profits, and is taxed at the dividend

tax rate. If there is an increase of value of stock, and a shareholder chooses to sell the stock,

the shareholder will pay a tax on capital gains (often taxed at a lower rate thanordinary

income). If a holder of the stock chooses to not participate in the buyback, the price of the

holder's shares could rise (as well as it could fall), but the tax on these gains is delayed until the

actual sale of the shares.

Certain types of specialized investment companies (such as aREITin the U.S.) allow the

shareholder to partially or fully avoid double taxation of dividends.

Shareholders in companies that pay little or no cash dividends can reap the benefit of the

company's profits when they sell their shareholding, or when a company is wound down and all

assetsliquidatedand distributed amongst shareholders. This, in effect, delegates the dividend

policy from the board to the individual shareholder. Payment of a dividend can increase the

borrowing requirement, orleverage, of a company.

Other corporate entities[edit source]

Cooperatives[edit source]

Cooperativebusinesses may retain their earnings, or distribute part or all of them as dividends

to their members. They distribute their dividends in proportion to their members' activity, instead

of the value of members' shareholding. Therefore, co-op dividends are often treated as pre-

taxexpenses. In other words, local tax or accounting rules may treat a dividend as a form of

customer rebate or a staff bonus to be deducted from turnover before profit (tax

profitoroperating profit) is calculated.

Consumers' cooperativesallocate dividends according to their members' trade with the co-op.

For example, acredit unionwill pay a dividend to representintereston a saver's deposit. A retail

co-op store chain may return a percentage of a member's purchases from the co-op, in the form

of cash, store credit, orequity. This type of dividend is sometimes known as a patronage

dividend orpatronage refund, as well as being informally named diviordivvy.[9][10][11]

Producer cooperatives, such asworker cooperatives, allocate dividends according to their

members' contribution, such as the hours they worked or their salary.[12]

Trusts[edit source]
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Inreal estate investment trustsandroyalty trusts, the distributions paid often will be consistently

greater than the company earnings. This can be sustainable because the accounting earnings

do not recognize any increasing value of real estate holdings and resource reserves. If there is

no economic increase in the value of the company's assets then the excess distribution (or

dividend) will be areturn of capitaland thebook valueof the company will have shrunk by an

equal amount. This may result incapital gainswhich may be taxed differently than dividends

representing distribution of earnings.

Mutuals[edit source]

The distribution of profits by other forms ofmutual organizationalso varies from that of joint

stock companies, though may not take the form of a dividend.

In the case ofmutual insurance, for example, in the United States, a distribution of profits to

holders ofparticipating life policiesis called a dividend. These profits are generated by the

investment returns of the insurer's general account, in which premiums are invested and from

which claims are paid.[13]The participating dividend may be used to decrease premiums, or toincrease the cash value of the policy.[14]Some life policies pay nonparticipating dividends. As a

contrasting example, in the United Kingdom, the surrender value of awith-profits policyis

increased by a bonus, which also serves the purpose of distributing profits.Life

insurancedividends and bonuses, while typical of mutual insurance, are also paid by some joint

stock insurers.

Insurance dividend payments are not restricted to life policies. For example, general

insurerState FarmMutual Automobile Insurance Company can distribute dividends to its

vehicle insurance policyholders.[15]

See also[edit source]

Dividend cover

Dividend policy

Dividend tax

Dividend units

Dividend yield

Special dividend

Liquidating dividend

Qualified dividend

P/E ratio

List of companies paying monthly dividends

CSS dividend policy
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References[edit source]

1. Jump up^Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper

Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 273.ISBN0-13-063085-3.

2. Jump up^Michael Simkovic,"The Effect of Enhanced Disclosure on Open Market Stock

Repurchases", 6 Berkeley Bus. L.J. 96 (2009).

3. Jump up^Amedeo De Cesari, Susanne Espenlaub, Arif Khurshed and Michael Simkovic,"The

Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions", 2010

4. Jump up^"dividend".Online Etymology Dictionary. Douglas Harper. 2001. Retrieved 2006-11-

09.

5. Jump up^[1]Public offering Kinder Morgan Management, LLC

6. Jump up^[2]U.S. Securities and Exchange Commission

7. Jump up^[3]EDGAR Online, Inc.

8. Jump up^Robert D. Arnott and Clifford S. Asness (January/February 2003)."Surprise! Higher

Dividends equal Higher Earnings Growth".Financial Analysts Journal. Retrieved 2011-01-04.

9. Jump up^Ace Hardware(March 22, 2001)."Annual Report, Section 1, Business, 10-K405 SEC

Filing".

10. Jump up^"Co-op pays out 19.6m in 'divi'".BBC Newsviabbc.co.uk. 2007-06-28. Retrieved

2008-05-15.

11. Jump up^Nikola Balnave and Greg Patmore."The History Cooperative Conference

Proceedings - ASSLH - Rochdale consumer co-operatives and Australian labour history".12. Jump up^Norris, Sue (March 3, 2007)."Cooperatives pay big dividends".The Guardian.

Retrieved 2009-06-09.

13. Jump up^"What Are Dividends?".New York Life. Retrieved 2008-04-29. "In short, the portion of

the premium determined not to have been necessary to provide coverage and benefits, to meet

expenses, and to maintain the company's financial position, is returned to policyowners in the

form of dividends."

14. Jump up^Hoboken, NJ (2002)."24, Investment-Oriented Life Insurance". In Fabozzi, Frank

J. Handbook of Financial Instruments. Wiley. p. 591.ISBN0-471-22092-2.OCLC52323583.

15. Jump up^"State Farm Announces $1.25 Billion Mutual Auto Policyholder Dividend".State

Farm. 2007-03-01.

External links[edit source]
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ional_Standard_Book_Numberhttp://en.wikipedia.org/wiki/International_Standard_Book_Numberhttp://en.wikipedia.org/wiki/Special:BookSources/0-471-22092-2http://en.wikipedia.org/wiki/Special:BookSources/0-471-22092-2http://en.wikipedia.org/wiki/OCLChttp://en.wikipedia.org/wiki/OCLChttp://www.worldcat.org/oclc/52323583http://www.worldcat.org/oclc/52323583http://www.worldcat.org/oclc/52323583http://en.wikipedia.org/wiki/Dividend#cite_ref-15http://www.statefarm.com/about/media/media_releases/auto_dividends.asphttp://www.statefarm.com/about/media/media_releases/auto_dividends.asphttp://www.statefarm.com/about/media/media_releases/auto_dividends.asphttp://en.wikipedia.org/wiki/State_Farmhttp://en.wikipedia.org/wiki/State_Farmhttp://en.wikipedia.org/wiki/State_Farmhttp://en.wikipedia.org/wiki/State_Farmhttp://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=17http://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=17http://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=17http://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=17http://en.wikipedia.org/wiki/State_Farmhttp://en.wikipedia.org/wiki/State_Farmhttp://www.statefarm.com/about/media/media_releases/auto_dividends.asphttp://en.wikipedia.org/wiki/Dividend#cite_ref-15http://www.worldcat.org/oclc/52323583http://en.wikipedia.org/wiki/OCLChttp://en.wikipedia.org/wiki/Special:BookSources/0-471-22092-2http://en.wikipedia.org/wiki/International_Standard_Book_Numberhttp://books.google.co.uk/books?id=F1hk6UFlsUsChttp://en.wikipedia.org/wiki/Dividend#cite_ref-14http://en.wikipedia.org/wiki/New_York_Lifehttp://www.newyorklife.com/cda/0,3254,10542,00.htmlhttp://en.wikipedia.org/wiki/Dividend#cite_ref-13http://www.guardian.co.uk/business/2007/mar/30/smes.technologyhttp://en.wikipedia.org/wiki/Dividend#cite_ref-12http://www.historycooperative.org/proceedings/asslh/balnave.htmlhttp://www.historycooperative.org/proceedings/asslh/balnave.htmlhttp://en.wikipedia.org/wiki/Dividend#cite_ref-11http://en.wikipedia.org/wiki/Bbc.co.ukhttp://en.wikipedia.org/wiki/BBC_Newshttp://news.bbc.co.uk/1/hi/business/6247926.stmhttp://en.wikipedia.org/wiki/Dividend#cite_ref-10http://sec.edgar-online.com/2001/03/22/0000002024-01-000003/Section2.asphttp://sec.edgar-online.com/2001/03/22/0000002024-01-000003/Section2.asphttp://en.wikipedia.org/wiki/Ace_Hardwarehttp://en.wikipedia.org/wiki/Dividend#cite_ref-9http://papers.ssrn.com/sol3/papers.cfm?abstract_id=390143http://papers.ssrn.com/sol3/papers.cfm?abstract_id=390143http://en.wikipedia.org/wiki/Dividend#cite_ref-8http://sec.edgar-online.com/kinder-morgan-management-llc/s-1a-securities-registration-statement/2001/04/30/section8.aspxhttp://en.wikipedia.org/wiki/Dividend#cite_ref-7http://www.kindermorgan.com/investor/kmr_2001_annual_report_financials.pdfhttp://en.wikipedia.org/wiki/Dividend#cite_ref-6http://www.sec.gov/Archives/edgar/data/54502/000095012901500750/0000950129-01-500750.txthttp://en.wikipedia.org/wiki/Dividend#cite_ref-5http://www.etymonline.com/index.php?search=dividend&searchmode=nonehttp://en.wikipedia.org/wiki/Dividend#cite_ref-4http://ssrn.com/abstract=1884171http://ssrn.com/abstract=1884171http://en.wikipedia.org/wiki/Dividend#cite_ref-Simkovic_Owner_3-0http://ssrn.com/abstract=1117303http://ssrn.com/abstract=1117303http://en.wikipedia.org/wiki/Dividend#cite_ref-Simkovic_Disclose_2-0http://en.wikipedia.org/wiki/Special:BookSources/0-13-063085-3http://en.wikipedia.org/wiki/International_Standard_Book_Numberhttp://en.wikipedia.org/wiki/Arthur_O%27Sullivan_(economist)http://en.wikipedia.org/wiki/Dividend#cite_ref-1http://en.wikipedia.org/w/index.php?title=Dividend&action=edit&section=16


18/50

Look updividendin

Wiktionary, the free

dictionary.

Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends U.S. Securities

and Exchange Commission

Why Should Companies Pay Dividends?

Dividend Policyfrom studyfinance.com at theUniversity of Arizona

Common Stock DividendsEx-Dividend Dates for Common Stock Dividends

The new U.S. dividend tax cut trapsfrom Tennessee CPA Journal, Nov. 2004

UK Dividend Tax Rates

Investment basics:

CurrencyIndian Rupee (INR)

Foreign exchange controlThere is a

simplified regulatory regime for foreign

exchange transactions and liberalized capital

account transactions. Current account

transactions are fully permitted unless

specifically prohibited. The central bank

monitors capital account transactions. Full

foreign investment is permitted in most

industries, while sector-specific caps have

been set for foreign investment in certain
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