Types of Dividend

Dividends are payments issued by companies to shareholders for investing their money in the companies. With dividends, investors can earn income from investments in the stock market. Whether you are an experienced investor or a newbie, it is very important to understand the various types of dividends and how they would impact investments. Thus, in the following blog, we elaborate on the dividend meaning, what are the different types of dividends, their impact on the share prices, and finally, how they are calculated.

What are the Different 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 an 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 monetize their assets or pass on ownership rights of certain assets to their shareholders. Property dividends are mainly distributed when the company likes to save cash or optimize 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, from its current offers, a cash dividend. Instead, it promises 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

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 stabilize 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 owns 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.

Conclusion
One of the best ways that companies could compensate their shareholders is by making dividends. Knowledge of dividend meaning, therefore, can help investors make smarter decisions based on the types of dividends one can have. From cash and stock dividends to liquidating ones, 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 of dividends is easier and more effective for any individual who wishes to take advantage of this opportunity.