Different Types of Dividends

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Dividends are a way for a company to reward you for investing money into the business. Companies that issue stock will generally offer payments to shareholders on a quarterly or annual basis. A firm will normally offer a dividend if it is turning a profit, but the type of dividend can vary depending on the organization's overall financial situation.

Cash

  • Cash dividends are paid for each share of stock you own in a company. Normally the board of directors will decide what percentage of the organization's earnings will be paid out to shareholders on a quarterly basis. If you are investing for current income, stocks that pay cash dividends can be beneficial, however the amounts paid out are taxable. Many companies will issue a cash dividend to indicate the firm is performing well and to attract new investors.

Stock

  • Many companies pay dividends in stock so you can avoid paying any taxes until the stock is actually sold. In most cases you will receive a specific number of extra shares in the company based on the amount you already own. Stock dividends tend to cause the price of the company stock to decline since more shares are being issued to people already holding shares. A firm that is experiencing difficulty with cash flow may elect to reward shareholders with additional stock in the company as an alternative for not paying a dividend at all.

Property

  • Property dividends are generally issued by companies that are having financial troubles but still wish to reward shareholders for their investment. As part of a property dividend, you may receive products the company makes, services the company offers, or stock in a subsidiary owned by the firm. Property dividends are taxable based on the value of what you receive and are normally issued without prior notice to shareholders.

Scrip

  • A firm experiencing difficulty raising cash may issue a scrip dividend instead of paying money to shareholders. Scrip dividends are similar to you receiving a share of stock as payment from the company, but can be in the form of a promissory note assuring you payment of stock at a later time. This type of dividend can provide a tax benefit over cash since you do not have to claim it until the shares are sold, and it can benefit the company by allowing it to use cash for other priorities in times of crisis.

Liquidating

  • Companies that are not meeting expectations and are viewed by its officials as failing will issue liquidating dividends to shareholders as a way of paying them back for their investment. Since the firm has little or no income, actual assets are used to pay the dividend. Under law, a failing company must pay all its liabilities before any liquidating dividends can be given to investors.

References

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