Dividend is the payment by a company to its shareholders out of its distributable profit. In other words, dividend is paid to the shareholders out of the revenue profits earned by it in the ordinary course of business.
Concept of Dividend
Dividend represents that part of the profit of a firm which is distributed to the shareholders. The company declares the amount of dividend at its shareholders’ meeting. Shareholders will get dividends in proportion to their shareholding in the company. Dividend may be in the form of cash or non-cash, i.e. bonus shares.
Nature of Dividend
Dividend decision is the financing decision of a business. It is the distribution of revenue profit to the shareholders in proportion to their holdings.
The nature of dividends is discussed below
i. Cash or Non-cash:
Dividends may either be in cash or non-cash. Dividends are generally paid in cash to the shareholders but sometimes instead of cash payments, shares are issued to the existing shareholders, free of cash—which is known as issue of bonus shares.
ii. Final or Interim:
After finalization of accounts, the directors judge the financial position and then recommend the amount of dividend at the annual general meeting. Such dividend is called final dividend whereas any dividend paid between two annual general meetings is called interim dividend.
iii. Fixed or Variable:
In case of profit, preference shareholders are entitled to get dividend at a fixed rate as per terms of their issue. Equity shareholders are entitled to get dividend out of the balance left after payment of preference dividend and their rate of dividend may vary from year to year depending on the volume of profit.