What is Dividend?

Dividend is the appropriation out of the profits of the company. It is distributed among the shareholders of the company. The term dividend is derived from a Latin word “Dividendum” which means that which is to be divided. Dividend is the part of the annual net profit of the company which is appropriated among the shareholders of the company.

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It refers to the return which is payable to the shareholders (members) of the company for the investment which they have made in the share capital of the company. Profit is the difference between the income and expenditure for a given period.

Dividend is a share in the annual distributable profits of the company to which the shareholders are entitled when it is formally declared by the company. Dividend is declared only on the recommendations of the Board of Directors of the company.

Generally, refers to annual or final dividend unless it is specifically mentioned as interim dividend.

The Institute of Chartered Accountants of India has defined dividend as, “A distribution to shareholders out of profits or reserves available for this purpose”.

The Supreme Court has defined it as, “In case of going concern, it means portion of profits of a company, which is allotted to the holders of shares in a company.”

Dividend Rights As Regards To Shares:

Preference Share carry preferential rights to receive a fixed rate of dividend. They have the first charge on the distributable amount of net profit. The holders of preference shares have a prior right to receive the dividend before any dividend is paid to the equity shareholders. The rate of dividend of preference shares is prescribed at the time of issue.

Equity shares do not carry preferential rights as to the payment of dividend. They are given dividend at a fluctuating rate depending upon the profits and growth of the company.

Legal provisions:

A company may declare and pay dividend for any financial year out of the following:

Current profits, net profits arrived that after deducting depreciation.
Out of the profits of the company of any previous financial year after providing for depreciation.
Dividend can be paid out of capital profits if realised in cash.
The articles of association of the company allow its declaration.
Dividend can be paid out of free reserves of the company.
Dividend cannot be paid out of capitaol.

Features of Dividend:

It is the part of annual net profit which is distributed among its shareholders.
Dividend is payable out of net profits of the company after providing for depreciation.
Dividend cannot be paid out of capital.
It is an unconditional payment made by the company.
Dividend is payable only to the shareholders of the company.
Preference shareholders receive a fixed rate of dividend, whereas, the equity shareholders receive dividend as per the net profits of the company.
Dividend as recommended by the Board of Directors is approved and declared by resolution passed in the Annual General Meeting by the shareholders.
The rate of dividend, amount of dividend to be distributed, book closure date, record date, date of AGM is discussed by passing a resolution in the board meeting.
Shareholders may declare or lower rate of dividend than what is recommended by the board but not higher than that.
Dividend once approved and declared by the shareholders of the company, creates an obligation on the part of the company, it cannot be reversed.
The company has to deposit the dividend amount in a separate bank account opened in a schedule bank called as dividend account within 5 days of its declaration.
Dividend is to be paid in cash.
Dividend is always paid on the paid-up share capital of the company.
The payment of dividend is not an expenditure of the company, as it is a payment made to its shareholders.

What is Divided Yield?

Dividend yield is the measurement of the percentage of dividend paid per each share with its prevailing share price. It is one of the ways, shareholders determin, if a stock is profitable and fundamentally strong.

It is calculated by dividing the amount of dividend the company pays per share annually in dividends, by its prevailing share price.

Dividend yield is determined by, dividend per share (DPS) divided by current share price.

DIVIDEND YIELD =   DPS/SHARE PRICE

What is Dividend Payout Ratio(DPR)?

The dividend payout ratio is the total amount of dividend paid to the shareholders against the total profits generated in the current accounting period. It measures the rate or percentage of net profits distributed to the sharholders.

A greater DPR indicates that the company is not reinvesting in the business to the fullest and distributing in the form of dividends to attract income investors.

A lesser DRP indicates that the business is retaining the money in the business and re-investing the same in the business for expansion and diversification activities. In due course of time, companies of these type tend to generate higher levels of capital gains for investors.

This helps investors to understand what type of returns the company is capable of yielding, dividend income or capital gains. Accordingly, investors who want a steady and regular income will invest in the companies with a high DPR whereas, investors who are interested in the potential profits from a significant rise in share price, further expansion and diversification and capital gains may invest in companies with a low DPR.

DPR =DIVIDEND PER SHARE/NET PROFIT

Interim Dividend Meaning:

This is the dividend which is declared and paid out between two annual general meetings in a current financial year.
An interim dividend is paid in between or middle of the financial year that is before the preparation of the final accounts of the company.
Advice and consultation of the companies auditor should be taken into account before declaring the interim dividend.
It is decided and declared by the Board of Directors in the Board Meeting only if, the Article of Association authorise the Board of Directors to declare the interim dividend.
The amount to be given as interim dividend must be credited in the separate bank account in a schedule bank within 5 days of its declaration which is to be paid out within 30 days of its declaration to its shareholders.
The interim dividend is not the final dividend, it is only a part payment.
Dividend can only be declared out of the profits of the current financial year.
The company has to provide depreciation for the entire accounting period.

Final Dividend Meaning:

The final dividend is declared and paid out after the finalisation of its books of accounts.
It is decided and recommended by the Board of Directors and declared by the shareholders in the Annual General Meeting.
The declaration of the final dividend does not need the approval of the Articles of Association.
The rate of final dividend is always higher than the rate of interim dividend.
Dividend has the capacity to be declared from various sources like, profits of the current year, capital profits, free reserves, where as declaration of interim dividend can only be made out of the profits of the current accounting year.