Dividend

The dividend is the proportion of profits or benefits that a company distributes among its shareholders .

Shareholder status is usually coupled with the economic right to receive it. That is, right to dividend. Dividends represent the part of the profits that the company has obtained that are intended to remunerate shareholders

This concept is part of the liabilities of a company, since it leaves its balance sheet in the form of profit distribution, encouraging shareholders to wish to buy more shares of the company and, therefore, it can obtain financing.

The amount of the dividend must be approved at the General Shareholders’ Meeting, at the proposal of the  Board of Directors . Within the dividend distribution policy, the fundamental issue is the ability of the company to generate profits and the risk incurred to obtain them. Usually, when a company has many investment opportunities, the distribution of dividends decreases, since it has more sources of financing, although it is also true that it is not convenient to surprise shareholders with changes in the amount of these.

It is very common to calculate dividends through net profit and  payout, which is the percentage that is destined to pay dividends and remunerate shareholders.

Dividend = Net profit * Payout

Imagine that a company has a net profit of 100 monetary units and has a  25% payout  . The company will pay a dividend of:

Dividend = 100 * 25% = 75 monetary units

Dividend Types

In general, there are these kinds of dividends:

  1. Dividend on account:Dividend paid to the shareholder in his cash account as an advance on the benefit obtained.
  2. Complementary dividend:It is the dividend that is added to the delivered account.
  3. Extraordinary dividend: Dividends are distributed when there have been extraordinary benefits.
  4. Dividend in shares : The dividend is divided into shares, instead of money.
  5. Fixed dividend: It is a dividend that the company sets, regardless of the profit obtained.

In addition, we can distinguish between gross and net dividends , depending on whether or not taxes that fall on benefits are included.

The applications of dividend policies can be:

  • Constant annual.
  • Fixed percentage of the benefits of the year.
  • Arbitrary at the convenience of the company. For example, there may be a minimum dividend to which shares or dividends are added.

Finally, it will be the company who establishes the criteria to be entitled to receive dividends from the shareholder, indicating to what date it must have the shares deposited and purchased in the portfolio. Generally, share prices usually fall the day after the distribution of dividends by the company.

Example

Assume the following euro data for this company:

  • Profit to date (once the payouteffect is discounted ): 50,000
  • Corporation tax (assuming a 25% rate): -10,000
  • Provision for reserves (Imagine that it is 10%): -5,000
  • Loss compensation: -10,000

Maximum account dividend:  50,000 – (10,000 + 5,000 + 10,000) = 25,000 euros

The 25,000 euros will be the maximum dividend on account that can be delivered.

According to the previous example, suppose that the company decides to pay 20,000 euros in advance of the maximum dividend it will pay and, at the end of the year, decides to supplement its payment with the remaining 5,000 euros, distributing the final payment among its shareholders.

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