Dividend Definition | Cash, Stock & Property Dividend:- The smaller part of capital is known as share and the person, who owes shares, is known as shareholder. The return on these shares or investment is known as profit, and the part of profit, which is distributed among the shareholders, is known as Dividend. There are various types of dividend that probably used now days in the business market for paying shareholders return on their investments. This also probably depends on the nature and type of shareholders.
Common 3 Types of Dividend
- Cash Dividend
- Stock Dividend
- Property Dividend
- Cash Dividend
Cash dividend is the most common among types of dividend paid to shareholders. Simply this dividend is paid in the form of cash. Mostly organizations have a developed schedule of dividend payments through which certain portion of their income are paid to shareholders. The shareholders in most cases receive these dividends in the shape of cash (or check of company). But sometimes cash dividends are reinvested in the additional shares of the stock of company. In case of reinvestment option, a reinvestment plan is required which is generally called DRIP. Buying of fractional shares with the reinvested check is always virtually provided by the DRIP plan. If $25 is the current share price then 1.2 shares can be brought with the check of $30 dividend.
Dividend reinvestment plan is offered by more than 1,000 companies. The growth of the investment is enhanced by the reinvested dividends especially if the additional shares are obtained at a discount than the current market price. Almost 100 companies, including banks & utilities offer discount to promote dividend reinvestment.
In order to understand the profitable effect of dividend reinvestment over longer period of time let’s suppose there are two companies which are similar in every aspect except one dimension that one of them does not have reinvestment plan while other reinvests dividends at 5% discount. It is assumed that there is a cash earnings of 4% and there is constant 5% dividend yield in both companies. The shares of both companies are initially sold for $25 and there is $1 increase in the price of share per year for ten years. At the end of the proposed period the company with reinvestment plan has account value of $61.38 as compared to account value of $38.52 of other company which lacks reinvestment plan.
If certain investor instead of taking his securities home, keeps them with the broker for the purpose of safe keeping then these are referred be held in the street name. In this situation, the company pays dividends against the securities to the brokerage firm. The accounting system of the brokerage firm then distributes the large dividend check among his clients owning the relevant stock appropriately. There is certain type of arrangements made by the brokerage firms in which the any additional cash in account is automatically transferred to some types of interest earning fund.
There is slight inconvenience with the dividend reinvestment which is that the shares should be registered in the name of the individual investor rather registering in a street held name. There is holding of odd lots s a result of dividend reinvestment. The quantity of shares that are not divisible by 100 is considered as odd lot. At the annual meeting of Walt Disney Company (DIS, NYSE) in 1995, the shareholders voted for the proposal of reinstating of dividend reinvestment plan that had been halted in 1990 by the company. The voting against the proposal was recommended by the company on the cost effectiveness ground. At that time there were more than 470,000 shareholders of the company. The proposal was failed due to high expenses & clerical work for of the reinvestment plan.
- Stock Dividend
Types of dividend include stock dividend which is paid in the shape of additional shares of the company. This type of dividend is not paid in the shape of cash. Moreover it is announced by the companies in the shape of percentage like 10% stock dividends reflects that the person holding 100 shares of the company will receive additional certificates of10 shares. The person who possesses 1,000 shares will receive additional 100 shares.
In case of holding of odd lot, a check is received for the worth of the fractional shares that cannot be spread. For example if an individual holds 223 shares of value $30 each. Then 10% stock dividend reflects that the individual will receive additional 22.3 shares. In practical perspective, the individual will receive 22 additional shares along with check for 10% of $30.
The actual reason of offering of stock dividend by the companies is not clear but there are certain facts that may relate to the decision of offering of stock dividends. One fact may be the lack of sufficient cash by company to pay cash dividend. This situation may be common in the life cycle stages of adolescence or infancy. Another fact is that many shareholders are interested to receive stock dividends. There may be certain emerging company that offers cash dividend as well as stock dividend to its shareholders on regular basis.
- Property Dividend
The property dividend is related with the distribution of physical assets proportionately. The asset is generally something that is produced by the company. In the early days of the capital markets, property dividends were popular because at that time there is smaller number of shareholders in a particular company and also the company manufactured such kind of product that can be formally distributed.
The best example related with the property dividends is the London East Indies Company. The property dividend is distributed in the product of pepper & calico in 1928 after the discussion among shareholders on the advantages of property dividends versus cash dividends. Moreover the US railroad companies in past sometimes distributed parcels of lands to the shareholder from their land grants.