DIVIDEND, TYPES OF DIVIDEND, CUM DIVIDEND AND EX DIVIDEND

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what is a dividend?

A dividend is actually a share of economical benefit to the shareholder. A shareholder will get it only if management declares that they are going to distribute the dividend among shareholders.
Types of dividends:

• Cash

• Stock

• Asset

• Special

• Common

• Preferred

• Others

Cash: it is the most common type of dividend paid by the companies mostly through electronic channels but it can also be paid via check or cash.

Stock: company gives stock instead of cash to the shareholders based on the number of shares each shareholder owns.

Asset: a company is not bound to give only cash or stock in the form of a dividend, it can also pay in the form of assets like physical assets, investment securities, or real estate, but this practice is not very common.

Special: it is a dividend that does not follow the company’s regular policy. for example, if a company’s policy is to give dividend monthly, quarterly, semi-annually, or annually it will not follow this pattern instead of this it will declare the dividend whenever it has an excess amount of cash or management feels the need for a declaration of dividend without following any specific pattern or policy.

Common: common dividend is related to a specific group of shareholders which are common shareholders (ordinary shareholders) they receive dividends in the last, all other liabilities including preference shareholders dividend is paid before them.

Preferred: preferred dividend is related to another specific group of shareholders which are preferred shareholders, they receive dividends after the company pays its payables but they receive the dividend before common shareholders.

Others: in other options, we can include spin-outs or warrants like options but it is also not very common in practice.

when management will declare the dividend?

every company has its own policies regarding the distribution of dividends but mostly it is decided after all the expenses have been paid, all liabilities have been settled (including all taxes and interest payables). Now the company has to decide whether to retain the earnings or to distribute it in the form of dividends.

Steps in declaring the dividend

Normally there are 5 steps to declare the company’s dividend.

step 1: First, the company will generate profit by eliminating all expenses (including tax, interest, and all other expenses) from the revenue.

step 2: Now it will depend on the management and board of directors whether they want to retain it or they want to distribute it among the shareholders. if management decides to distribute the dividend then we will proceed to the next step.

step 3: In this step board of directors will officially approve the decision of declaration and distribution of dividends in documents.

step 4: The company will officially announce the dividend with all the special dates, for example, payout dates, etc.

step 5: The company will pay a dividend to the shareholders via any medium.

As mentioned above in step 4 of declaring the dividends we have used the word “special dates”. so what are those dates? any idea about that…

lemme explain the concept about those special dates…

Usually, management will announce following dates:

• ex-dividend date
• cum dividend date
• payout date

we can also call these three points as stages in dividend declaration.

lets discuss in detail.

What is CUM DIVIDEND:

A cum dividend is a dividend that is declared but not yet paid. it is a period of a company in which it is preparing itself to pay the dividend to its shareholders. it is basically a notice to all the shareholders that the company is going to pay the dividend very soon,

literal meaning:

the literal meaning of ‘cum dividend’ is ‘alongside or ‘with’ which means if a shareholder owns the stock during the period of cum dividend he will definitely receive the dividend.

But here is an interesting part of cum dividend… if an individual owns the share of a company but he sells it during the period of cum dividend he/she will not be able to receive the dividend, now a buyer of the cum dividend stock will receive the dividend.

For example, if Mr. A has a stock of company X, and company X is going through cum dividend period, which means it has declared that it will give dividends soon but has not paid yet, and now Mr. A sells the stock to Mr. K, now Mr. A is no longer entitled to receive the dividend instead Mr. K will now receive the dividend.

What is EX DIVIDEND?

After the cum dividend stage, the stock will enter in Ex-dividend stage also known as ‘XD’.

After the declaration of dividends by a company, the list of shareholders who will receive the dividend is now locked, it can not be changed any further.

it is a stage of a company where a company has declared its dividends and has finalized the list of receiving shareholders, no further amendments can be made in the list of shareholders receiving dividends.

But here in the case of selling the stock at the ex-dividend stage is totally opposite from cum dividend stage. if the owner of the stock sells its share at this stage, only he will be entitled to receive the dividend not the buyer of the stock because as I have mentioned earlier the lists of receiving shareholders have been finalized so no amendments can occur in the list.

for example, if Mr. A owns the share of company X, and company X is going through the ex-dividend stage which means it has already declared the dividend and finalized the list of receiving shareholders and now Mr. A wants to sell the stock to Mr. K, Mr. A will receive the dividend instead of Mr. K as Mr. A name has been entered and the list of receiving shareholders.