What are the Different Types of Dividends?

Dividends are the payments that a company pays to its shareholders. The different types of dividends include cash, stock, or other forms, each having different impacts on both income and share value. These dividends are distributed from net earnings and are paid quarterly or annually as per the company policy. Understanding different types of dividends will help any investor assess the probable returns from equity investments. This article describes the different types of dividends. 

Types of Dividends 

After understanding the dividend meaning, let’s now understand the various types of dividends in financial management.  

1. Cash Dividend 

Cash dividend is the most common form of dividend. Here, the company gives profit to the shareholders in the form of cash. It is paid on a per-share basis. This means that the more shares you own, the higher your dividend payout. For instance, if the XYZ company declares a cash dividend of ₹15 per share and an investor owns 200 shares, then the investor will receive a cash payment of ₹15*200 = ₹3,000. 

2. Stock Dividend 

Under stock dividends, instead of paying cash, companies will pay out additional shares to the shareholders. For example, if the XYZ firm declares a 20% stock dividend and an investor owns 200 shares, then they would get 40 extra shares or 20% of 200 shares as a stock dividend. The total number of shares that the investor would possess would rise to 240. The value of each share may be decreased proportionally by taking into account the new shares issued. 

3. Property Dividend 

Under property dividends, distribution takes the form of a distribution of assets rather than cash or shares. This kind of dividend enables companies to monetise their assets or pass on ownership rights of certain assets to their shareholders. Property dividends are mainly distributed when the company prefers to save cash or optimise its balance sheet.   

4. Liquidating Dividend 

A liquidation dividend is a form of dividend that emerges when the company is liquidating all of its capital. This is paid out to its shareholders when the company returns its capital during liquidation. For example, ABC Tech Solutions distributes 60% of its remaining assets as a liquidating dividend to the shareholders. So, each shareholder would receive an amount equal to ₹300 Lakhs INR (500 Cr x 0.60) through the liquidation of company assets. 

5. Scrip Dividend 

A scrip dividend occurs when a firm cannot pay a cash dividend from its current offerings. Instead, it assures to pay the shareholders at a later date and issues an I Owe You (IOU) in the form of a scrip instead of the immediate payment of cash. 

The Impact of Dividends on Share Prices 

Now that we have understood what dividends mean and their various types, let's see how dividends affect share prices. 

 Dividends can have a huge impact on the share price of an issuing company, both short-term and long-term. In general, the announcement of a dividend sends out signals of the financial health of a company and inspires considerable demand for stocks, and subsequently its price, and thus it causes the share price to appreciate significantly. 

However, the "ex-dividend date" is the date when the new buyers are no longer eligible to receive the declared dividend, and the stock price drops by the amount of the dividend. This is because the company's assets have fallen, and part of its earnings have been paid out to the shareholders. Long-term smooth dividend payments will make the share even more attractive to income-oriented investors, which will thereby stabilise the share price. 

How are Dividends Calculated? 

The formula for dividends is fairly uncomplicated. Generally, firms declare a "dividend per share" or DPS amount. Then the investor multiplies this amount by the number of shares she or he own to arrive at a total dividend payout. Easy enough is this:  

Dividend Payment = Dividend Per Share (DPS) × Number of Shares Held 

 For instance, if a company declares a DPS of ₹5 and you hold 100 shares, the dividend amounts to ₹500. 

Dividend Payout Ratio vs Dividend Yields 

The difference between the dividend payout ratio and dividend yield is as follows: 

Dividend Payout Ratio 

The dividend payout ratio describes what percentage of a firm's net income is paid as dividends. This is calculated as total dividends paid in any period as a proportion of total net income for the same period. Investors use this measure to help assess the sustainability and consistency of future dividends. 

Dividend Yields 

Dividend yield represents the return per year from dividends in relation to the current market price of the stock. It is computed as annual dividend per share divided by the prevailing current market price of the share. As dividend yields change with fluctuations in markets, investors make use of it as a metric to approximate returns they may get through stocks that pay dividends. 

Functioning of Dividends 

The dividend process consists of a structured set of internal approvals and compliance steps, which include: 

Step 1: Over time, the company generates revenues and earns retained earnings. 

Step 2: The management internally decides whether to reinvest the earnings or to distribute them in the form of dividends among the shareholders. 

Step 3: The amount is proposed by the board and voted for approval by the majority shareholders. 

Step 4: The firm announces the announcement date, record date, ex-dividend date, and the date of payment.  

Step 5: The dividend is paid out to shareholders of record, meaning those who hold the stock on the record date. 

Step 6: Dividend credit is extended to the eligible class of shareholders in forms of dividend per share. 

Importance of Dividends in Financial Modelling  

Dividends are important drivers in financial modelling since valuation, equity, and future cash flows depend on them. Forecasting dividends involves forecasting dividend policies, payout ratios, and expected growth to project future dividends. This helps analysts analyse long-run financial performance and shareholder returns. Dividends will impact the three key financial statements as follows: 

• Income Statement: PAT has fallen because part of the profit is given as a dividend instead of being retained. 
• Balance Sheet: Declared dividends create a liability called dividend payable, while decreasing retained earnings and cash balances. Cash Flow Statement: Dividend payments are financing cash outflows that reduce net cash available. 
• Cash Flow Statement: Dividend payouts represent financing cash outflows and consequently reduce net cash available. 

Conclusion 

One of the ways that companies could compensate their shareholders is by paying dividends. Knowledge of dividend meaning, therefore, can help investors make smarter decisions based on the types of dividends they can receive. From cash and stock dividends to liquidating dividends, each has significance. Dividend announcements, as well as payment dates, may easily be tracked by investors to lay down strategic plans for investments. With a stock market app, investment in and tracking dividends is easier and more effective for any individual who wishes to take advantage of this opportunity.