Dr. Zulfiqar Hasan
A dividend is a payment made by a corporation to its shareholders. Dividend is the part of the earnings of a corporation that is distributed to its shareholders annually.
- Payment of cash by the firm to its shareholders.
- Cash dividend given on face value
- Cash Dividend is not given on market price
- It is taxable dividend
- Dividends must notionally be “paid” from profits not capital.
- The cash dividend can be regular or special and may have franking credits (full or partial) attached.
Stock Dividends/ Bonus issues:
- A Stock dividend is the payment to existing owners of a dividend in form of stock.
- No cash leaves the firm.
- The firm increases the number of shares outstanding.
- Extra shares issued as a dividend.
- May be a general issue to all shareholders, or shareholders may participate in a bonus plan.
- Distribution from “income” attracts income tax, but distribution from “capital” does not.
- Bonus shares create more paper, not more value
A stock split is a method commonly used to lower the market price of firms stock by increasing the number of shares belonging to each shareholder. (L J Gitman). A stock split is a method to increase the number of outstanding shares through a proportional reduction in the par value of the share.
Determining how much of a company’s profit is to be paid to shareholders as dividends and how much is to be retained. Dividend policy involves the decision or payout earnings or to retain them for reinvestment in the firm. (Weston and Brigham)