The term dividend refers to the formal distribution of retained earnings, additional paid-in capital, or some other form of capital to shareholders. The payment of dividends to shareholders is approved by the company’s board of directors, and can include cash, property, or stock.
Typically, companies will issue dividends to shareholders from the company’s retained earnings, or profits, on a quarterly basis. Payment is usually quoted in terms of dollars per share, but can also be quoted in terms of a dividend yield.
Not all companies pay dividends to shareholders; instead, the management team will invest the profits back into the company in ways that generate additional profits. This is especially true for companies that are rapidly growing.
The payment of dividends must be formally approved by the company’s board of directors, even if the company has a long history of quarterly payments. While cash is the most common form of dividends paid by a company, they can take all of the following forms:
- Cash: paid from the company’s retained earnings, or profits.
- Property: also known as “dividend in kind,” this includes any assets of the company other than cash.
- Liquidating: if a dividend is paid and retained earnings are not the source of funding, there is a reduction to paid-in capital and a liquidating dividend results.
- Scrip: instead of paying a dividend immediately, a scrip dividend is declared and payable at a future point in time.
- Stock: companies can reclassify retained earnings as contributed capital and issue a stock dividend instead of cash.