Types of dividends
/What are Dividends?
A dividend is generally considered to be a cash payment issued to the holders of company stock. These payments are made to shareholders as a form of compensation for their investments made in a corporation. Dividends are authorized by the board of directors of the issuing entity, and are usually scheduled to be made on a recurring basis. However, there are several types of dividends, some of which do not involve the payment of cash to shareholders. These dividend types are noted below.
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.
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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.
Cash Dividend Example
On February 1, ABC International's board of directors declares a cash dividend of $0.50 per share on the company's 2,000,000 outstanding shares, to be paid on June 1 to all shareholders of record on April 1. On February 1, the company records this entry:
| Debit | Credit | |
| Retained earnings | 1,000,000 | |
| Dividends payable | 1,000,000 |
On June 1, ABC pays the dividends, and records the transaction with this entry:
| Debit | Credit | |
| Dividends payable | 1,000,000 | |
| Cash | 1,000,000 |
Stock Dividend Example
ABC International declares a stock dividend to its shareholders of 10,000 shares. The fair value of the stock is $5.00, and its par value is $1. ABC records the following entry:
| Debit | Credit | |
| Retained earnings | 50,000 | |
| Common stock, $1 par value | 10,000 | |
| Additional paid-in capital | 40,000 |
Property Dividend Example
ABC International's board of directors elects to declare a special issuance of 500 identical, signed prints by Pablo Picasso, which the company has stored in a vault for a number of years. The company originally acquired the prints for $500,000, and they have a fair market value as of the date of dividend declaration of $4,000,000. ABC records the following entry as of the date of declaration to record the change in value of the assets, as well as the liability to pay the dividends:
| Debit | Credit | |
| Long-term investments - artwork | 3,500,000 | |
| Gain on appreciation of artwork | 3,500,000 |
| Debit | Credit | |
| Retained earnings | 4,000,000 | |
| Dividends payable | 4,000,000 |
On the dividend payment date, ABC records the following entry to record the payment transaction:
| Debit | Credit | |
| Dividends payable | 4,000,000 | |
| Long-term investments - artwork | 4,000,000 |
Scrip Dividend Example
ABC International declares a $250,000 scrip dividend to its shareholders that has a 10 percent interest rate. At the dividend declaration date, it records the following entry:
| Debit | Credit | |
| Retained earnings | 250,000 | |
| Notes payable | 250,000 |
The date of payment is one year later, so that ABC has accrued $25,000 in interest expense on the notes payable. On the payment date (assuming no prior accrual of the interest expense), ABC records the payment transaction with this entry:
| Debit | Credit | |
| Notes payable | 250,000 | |
| Interest expense | 25,000 | |
| Cash | 275,000 |
Liquidating Dividend Example
ABC International's board of directors declares a liquidating dividend of $1,600,000. It records the dividend declaration with this entry:
| Debit | Credit | |
| Additional paid-in capital | 1,600,000 | |
| Dividends payable | 1,600,000 |
On the dividend payment date, ABC records the following entry to record the payment transaction:
How Often are Dividends Paid?
A corporation commonly pays out dividends on a quarterly basis. However, there is no hard and fast rule governing the frequency of payments; some organizations only issue one dividend payment per year. Also, if a business is not generating sufficient cash for a dividend, or the board of directors feels that the money is better put to other uses, then a dividend may be skipped entirely.
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