Dividend Assignment 1212

Dividend
A dividend is the distribution of a portion of the company's earnings, decided and

managed by the company’s board of directors, and paid to a class of its shareholders.
A dividend is a token reward paid to the shareholders for their investment in a

company’s equity, and it usually originates from the company's net profits. While the
major portion of the profits is kept within the company as retained earnings–which
represent the money to be used for the company’s ongoing and future business
activities–the remainder can be allocated to the shareholders as a dividend. At times,
companies may still make dividend payments even when they don’t make suitable
profits. They may do so to maintain their established track record of making regular
dividend payments.
Types of dividend
 Cash dividend. The cash dividend is by far the most common of the dividend types used.
On the date of declaration, the board of directors resolves to pay a certain dividend amount in
cash to those investors holding the company's stock on a specific date. The date of record is
the date on which dividends are assigned to the holders of the company's stock. On the date
of payment, the company issues dividend payments.
 Stock dividend. A stock dividend is the issuance by a company of its common stock to its
common shareholders without any consideration. If the company issues less than 25 percent
of the total number of previously outstanding shares, then treat the transaction as a stock
dividend. If the transaction is for a greater proportion of the previously outstanding shares,
then treat the transaction as a stock split. To record a stock dividend, transfer from retained
earnings to the capital stock and additional paid-in capital accounts an amount equal to
the fair value of the additional shares issued. The fair value of the additional shares issued is
based on their fair market value when the dividend is declared.
 Property dividend. A company may issue a non-monetary dividend to investors, rather
than making a cash or stock payment. Record this distribution at the fair market value of the
assets distributed. Since the fair market value is likely to vary somewhat from the book
value of the assets, the company will likely record the variance as a gain or loss. This
accounting rule can sometimes lead a business to deliberately issue property dividends in
order to alter their taxable and/or reported income.
 Scrip dividend. A company may not have sufficient funds to issue dividends in the near
future, so instead it issues a scrip dividend, which is essentially a promissory note (which may
or may not include interest) to pay shareholders at a later date. This dividend creates a note
payable.
 Liquidating dividend. When the board of directors wishes to return the capital originally
contributed by shareholders as a dividend, it is called a liquidating dividend, and may be a
precursor to shutting down the business. The accounting for a liquidating dividend is similar to
the entries for a cash dividend, except that the funds are considered to come from the
additional paid-in capital account.
SCOPE AND OBJECTIVE
The objective of Dividend Distribution Policy is to maintain equilibrium between retention of

profit to enhance value and also to meet long term growth plans of the bank and rewarding its
shareholders with optimum amount for reposing their confidence in our bank.
ADVANTAGES OF DIVIDEND
INVESTOR PREFERENCE FOR DIVIDENDS

The investors are more interested in a company that pays stable dividends. This assures them
of a reliable source of earnings, even if the market price of the share dips.
BIRD-IN-HAND FALLACY
This theory states that the shareholders prefer the certainty of dividends in comparison to the
possibility of higher capital gains in future.
STABILITY
Investors prefer companies that have a track record of paying dividends as it reflects positively
on its stability. This indicates predictable earnings to investors and thus, makes the company a
good investment.
BENEFITS WITHOUT SELLING

Investors invested in dividend-paying stocks do not have to sell their shares to participate in the
growth of the stock. They reap the monetary benefits without selling the stock.
DISADVANTAGES OF DIVIDEND
CLIENTELE EFFECT
If a dividend-paying company is unable to pay dividends for a certain period of time, it may
result in loss of old clientele who preferred regular dividends. These investors may sell-off the
stock in short term.
DECREASED RETAINED EARNINGS

When a company pays dividends, it decreases its retained earnings. Debt obligations and
unexpected expenses can rise if the company does not have enough cash.
FACTORS OF DIVIDEND
 Financial Needs of the Firm

 Stability of Dividends
 Legal Restrictions
 Restrictions in Loan Agreements
 Liquidity
 Access to Capital Market
 Stability of Earning
 Objective of Maintaining Control

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Dividend

A dividend is the distribution of a portion of the company's earnings, decided and

A dividend is a token reward paid to the shareholders for their investment in a

SCOPE AND OBJECTIVE

The objective of Dividend Distribution Policy is to maintain equilibrium between retention of

INVESTOR PREFERENCE FOR DIVIDENDS

BENEFITS WITHOUT SELLING

DECREASED RETAINED EARNINGS

 Financial Needs of the Firm

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