Every self-employed, business minded individual and in particular every share or stock holder should understand dividends, so here’s my take where I’ll explain the different types of dividends you are likely to encounter.

One of the main benefits of share ownership is that the profits made by the corporation who issued the stock are often shared amongst stockholders in the form of dividends. Dividends can take many forms, and your eligibility to receive them can depend on the type of company that it is, and the type of shares that you own. In this article, we take an in-depth look at the various types of share dividends, and the circumstances in which they are issued.

Dividends

Dividends are payments that a corporation makes to its shareholders. In essence, dividends are a form of profit sharing, so that if the company is making profits, then the shareholders will share in those profits. Companies pay dividends to their shareholders in order to make their shares more attractive to investors. Usually, when a company makes a profit or a surplus, the money can either be re-invested in the business or paid to the shareholders in the form of dividends. If the money is re-invested, then these earnings are referred to as ‘retained earnings’. Often, companies will split their profits between retained earnings and dividends.

There are a number of ways in which dividends can be paid. Most dividends are paid in cash, which is usually sent as a cheque. Sometimes, they are paid in the form of additional shares in the company, either newly-created shares or pre-existing shares that have been purchased on the stock market. In retail co-operatives, dividends are sometimes paid in the form of store credits. It is also fairly common for public companies to offer dividend reinvestment plans, which use cash from dividends to buy additional shares for the shareholder.

In the case of joint stock companies, dividends are paid as a fixed amount per share, so that shareholders will receive dividends that are in proportion to their shareholding. So if the cash dividend is 50p per share, and you owned 100 shares, you would receive a cheque for £50. Likewise, when dividends are paid out in the form of shares, the amount of shares that you receive is dependent on the number of shares owned. Dividends from joint stock companies are not counted as tax-deductible expenses. Instead, dividends are the division of post-tax profits among eligible shareholders. In the case of co-operative businesses, dividends are allocated according to the activity of the members, so they are usually considered to be a pre tax expense. Most public companies will pay dividends on a fixed schedule, although they can choose to pay additional dividends as and when they see fit. These additional dividends are usually called ‘special dividends’ to distinguish them from regular dividends.

The type of dividend that you receive is largely dependent on the type of shares that you own. Owners of preferred shares are usually guaranteed regular, fixed dividends, whereas owners of common stock will receive performance-related dividends. These can vary in value depending on how well the corporation is doing, and the exact amount paid out to common stockholders in the form of dividends is usually announced in the company’s annual financial report, except in the case of special dividends.

When a company announces a dividend, they will also announce a ‘book closure date’, which is the date on which the company will close its books temporarily to allow for fresh transfers of stock. This prevents speculators from purchasing shares that are eligible for a dividend just after the dividend is announced, but before it is paid. In order to be eligible for dividends, shareholders must have registered their share ownership on or before the date in question.

Read more on Wikipedia: http://en.wikipedia.org/wiki/Dividend

Here’s an infographic explaining dividends:

Dividends infographic