Dividends
Dividends are payments made by a corporation to its shareholders. It is the portion of corporate profits paid out to stockholders.
When a corporation earns a profit or has a surplus, that money can be put to two uses:
- it can either be re-invested in the business (called retained earnings)
- it can be paid to the shareholders as a dividend
Many corporations retain a portion of their earnings and pay the remainder as a dividend. For a joint stock company, a dividend is allocated fast as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather, it is the division of an asset among shareholders.
Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from a regular one. Co-operatives, on the other hand, allocate dividends according to members' activity, so their dividends are often considered to be a pre-tax expense.
Dividends are usually settled on a cash basis, as a payment from the company to the shareholder. They can take other forms, such as shares in the company (either newly-created shares or existing shares bought in the market.) Further, many public companies offer dividend reinvestment plans, which automatically use the cash dividend to purchase additional shares for the shareholder.
