Dividends are the distribution of corporate earnings to its shareholders. They are determined by the corporate board of directors and may consist of cash or additional stock. Dividends are most commonly distributed quarterly.

Shareholders that own shares before the ex-dividend date are entitled to receive any dividends that have been approved by the board of directors.

Many corporate boards choose not to payout dividends and instead retain any earnings which are used to grow the company.

Corporations can make dividend payments even when they have no or insufficient income in order to create a track record of consistent dividend distributions. Dividends may be paid out of earnings and/or retained earnings but corporations are usually prohibited from paying dividends out of the capital of the company.

Preferred dividends are dividends paid on preferred shares. These dividends are often higher than those paid on common stock, for the same company, but not always. Preferred dividends are given priority over common stock dividends which means they must be paid before common stock dividends are paid. This is often calculated on a cumulative basis. Preferred shareholders usually receive a preference in the event that the corporation is liquidated. In addition, preferred shareholders may have the right to convert their shares into common stock at some point in time based on a defined formula.

Dividends may be cumulative or non-cumulative. Cumulative dividends accumulate over time if they are not paid out when due. They are generally paid on preferred stock, but not all preferred stock has this right. Cumulative dividends must be paid, even if they are paid at a later date. Cumulative dividends must be paid in full before any dividends can be paid to owners of common stock.

The ex-dividend date, or ex-date, is the date after which a new buyer of a stock will not be entitled to a recently declared dividend. It is usually one business day before the record date. To receive a dividend, a stockholder must own the stock before the ex-dividend date. The record date is the date a corporation determines who is entitled to receive a dividend.

 

Stock Dividends

Stock dividends are corporate dividends paid to its common stock shareholders in the form of additional stock instead of cash. Stock dividends dilute the prices of shares but allow the corporation to reward its shareholders while conserving cash. Unlike cash dividends, stock dividends are not immediately taxable, allowing investors to defer taxes until they sell the shares. This is a significant tax benefit. Many corporations prohibit the sale of those shares for a defined period of time such as one year.

 

Growth Company

A growth company is a company that generates substantial cash flow, but pays no dividends or distributions to the owners, instead opting to reinvest all cash ftow back into the company in order to maximize the growth of the company and future profits. A growth company tends to have very profitable investment opportunities for its core retained earnings. Growth .companies are often referred to as Gazelle Companies.

 

Distribution of Dividends to Shareholders or Distribution of Interest to Bondholders

There are advantages and disadvantages to paying dividends to shareholders as opposed to paying interest to bondholders. Paying dividends to shareholders results in double taxation. The corporation pays tax on its income and then shareholders pay tax on dividends received. Paying out interest to bondholders is a deductible expense while bondholders pay taxes on interest received. Whether to distribute dividends to shareholders or pay interest to bondholders is a decision every board of directors must make.

 

 

 

Restricted Corporate Stock

Plowback or Plowback Ratio

Retained Earnings of Corporation

Warrants and Stock Options