MGT201 Module 13 Topics 229-256 Preparation

Topic 229: Concept of dividend

We are starting our discussion on Dividend Policy but before going into the detail we first have to see that what is Dividend.

Dividend:

Profit distributed among shareholders:

Dividend is actually the distribution of profit as whenever any business earns profit and distributes this profit among its owners or shareholders. So, the profit which is distributed among shareholders is termed as Dividend.

All of the profit may be distributed among the shareholders or a part of the profit may be distributed or in some years, the profit might be earned but nothing is distributed among the shareholders so, the distribution of dividend is not certain as there may be dividend or may not be dividend. So, there are all possibilities of having dividend.

Paid out of Retained Earnings:

Dividend is paid from the profit but this profit is firstly added in our accumulated profit or retained earning. So, for the payment of Dividend, we need not to have current year’s profit meaning that in such a year in which even any company has not earned any profit or has gone in loss and also in that year the Dividend can be paid out. Because the dividend is not paid out of the current year’s profit but it is paid out of the accumulated profits which we name Retained Earnings. If we have Retained Earnings or Retained Profits are present then we can pay our dividend from that profit.

Annual Dividend:

The Dividend is usually paid at the end of the year when the amount of profit has been calculated.

Interim Dividend:

But if there is a surety that the company is doing so well that it is likely to have a lot of profit by the end of the year then this company also pays Dividend during the year and that is called Interim Dividend.

Why should a company pay Dividend?

Because Dividend is the return of the investor or the shareholder meaning that shareholder has invested his money in any business for the reason that to earn return and that return is received in two forms as: Dividend: The Dividend that a company pays him.

Capital Gain: The Capital Gain which he/she get through purchase or sale of shares. Capital Gain simply means that if we purchase an asset and sell it and if we get any profit or return from the difference of that buying or selling price then it is called Capital Gain. When we buy a stock on lesser price and sell a stock at higher price then the difference in the two is the Capital Gain of the investor.

So, the investor is not only looking for Capital Gain but investor is also looking for the profit which is there with the company. These two things collectively make the return of an investor. As investor goes towards Capital Gain but he also wants to get dividend also.

The Capital Gain can be earned if we frequently buy and sell shares but dividend cannot be earned by quickly buying and selling shares as to earn dividend, we have to hold the stock or shares for a certain period of time. As we have said that generally companies give annual dividend and if we purchase a shares then theoretically speaking we have to hold that shares with one year in order to get dividend on that share.

Another important thing that we have to keep in mind that is related to Dividend or Capital Gain which is; investment in Shares/Securities/Stock Exchanges is not gambling, it is not speculation, it is about earning normal return over longer period of time because Stock Exchanges are called Capital Markets and in Capital Markets, the investment never for short term period of time.

Common Share Dividend and Preferred Share Dividend: Dividend is

paid for the reasons because it is return for the shareholder or investors and they have made this investment for getting that return. This dividend is paid on both types of shares meaning that we have Common stocks and also have Preferred stocks.

Common shares or stocks are those which represent the true ownership of any company and they have an element of risk more as compare to the Preferred shares. The dividend is paid on these Common shares after the payment of dividend to Preferred shareholder. So, Common stocks holders may or may not get their dividend if it is all distributed among Preferred shares.