What are the different types of dividends?

All things equal, investors generally prefer companies that pay regular dividend, going by the idiom “A bird in hand is worth two in the bush”.

Simply put, a dividend is the distribution of profits by a company to its shareholders. When a company earns profit, the residual profit after making contractual commitments and all operating and non- operating expenses is attributable to the owners (i.e. the shareholders of the company). The management can decide to return a part or whole of the profit generated and retained earnings to its shareholders or it can reinvest or do both.   

However, this distribution to shareholders can be done in different ways, namely-  

A) Cash Dividend- The most common form of distribution wherein the company pays actual cash, usually through electronic transfer. Cash dividend can be further sub categorised as –  

Regular Dividend- A consistent and scheduled payment, usually done quarterly.  

Special Dividend – An additional, irregular, generally one off dividend payment by the company.  

Liquidating dividend -Payment is in form of proceeds of liquidation. It is the last and final payment to the shareholders.  

B)Stock Dividend – These are paid out to shareholders by issuing new shares in the company. These are paid on pro rata basis, depending on the number of shares owned by the investors.  

C)Asset Dividend – The company may choose to pay dividend to shareholders in any form other than cash. It may pay out other assets such as investment securities, physical assets and real estate among other things. Although, this form of payment is the least common method adopted by companies.  

What does dividend policy convey?  

Dividend payment is most commonly viewed as a positive signal, suggesting the company has been generating positive cash flows and earnings. In rare circumstances, it may also suggest that the company has lack of reinvestment opportunities.  

All things equal, investors generally prefer companies that pay regular dividend, going by the idiom “A bird in hand is worth two in the bush”.  

In a tax environment where dividend is taxed under regular slab while capital gain is taxed at lower rates, investors would prefer companies that pay lower dividend and reinvest their earnings, to avoid higher tax burden.