Special Dividend Meaning
Special dividend, also known as extra dividends or non-recurring dividends, refers to the declaration and distribution of an amount which is in addition to the regular dividend and is usually given when the company receives large windfall from asset sales or other one-time events.
The amount of special dividend is paid out of companies’ disinvestment or sale of fixed assets of the company. That is why the amount of dividend seems to be very high as compared to the regular dividend as it is one time or non-recurring payments made by the company. The company finalizes its decision by conducting a board meeting. It decides the amount or percentage at which the dividend is to be declared and paid to the shareholders.
Reasons
- When the company has surplus cash in hands and wants to reduce the same than in that situation, the company may declare a special dividend to reduce such cash balances.
- In a situation where the company wants to change its capital structure of debt and equity, then they may declare a dividend to shareholders.
- It is generally seen that in a situation where the company wants to utilize surplus funds and does not want to buyback or payout its obligations, then in that situation also the company chooses the option of declaring such a dividend.
Rules of Special Dividend
Generally, it is seen that the company at first declares the dividend then records the same in the books. And after that, pays it to the shareholders of the company. In this case, the shareholder who is holding shares on the record date will receive the dividend, whether he is a shareholder or not on the date of payment. However, in case of a special dividend, anyone who is holding shares on the declaration date will receive a dividend. The rules and guidelines are much easier as compared to the regular dividend.
Steps to Declare Special Dividend
Step #1: The basic and preliminary step to declare any kind of dividend is to analyze the position of business net profits.
Step #2: After that, if the management wants to declare dividends, then they have to conduct a board meeting to vote upon and finalize the decision.
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Step #3: While deciding the amount or percentage to be declared as dividends, one must also analyze the industry norms and patterns in which the entity operates.
Step #4: Finally, declare and distribute the amount of special dividend to the shareholders of the company.
Journal Entries
Suppose a company has declared a special dividend of $1 per share on its 50,000,000 shares on date 01st January 2020 which is payable on 15th January 2020 then the journal entries are as follows:
The amount to be paid is $(50,000,000 * 1) i.e. $50,000,000. The company at first makes provision or transfer the due amount to the payables amount from the total reserves and surpluses available with the company. After that, the same would be paid to the shareholders of the company from such a provided or transferred account. After payment of such a dividend amount, the balance remaining in the payable account would be zero as the provided amount was paid to the shareholders of the company.
On 1st January 2020 the following entry is to be passed:
On 15th January 2020 the final entry of payment is to be passed:
Impact
- The price of shares first rises then after payment of dividends, i.e., ex-dividend the price of shares fall.
- Generally, it was seen that some shareholders buy shares of the company for the sake of receiving dividend income and sell instantly as and when the dividend recorded in the books, so it was seen that heavy selling of shares was seen.
Special vs. Regular Dividend
- The regular dividend is declared by the company yearly to maintain the companies trend and also formed pursuant to an analysis of financial results, and on the other hand special dividend is non-recurring and is declared only one time by the company.
- The finalization of books of accounts is mandatory in case of a regular dividend, but in case of a special dividend, it does not require the finalization of accounts.
- The regular dividend can only be declared and paid after the end of the year, but in case of a special dividend, it can be declared and paid at any time during the year.
Advantages
- It increases the market share of the company as when the company declares such kind of dividend, the market value per share sharply rises.
- When the company declares a special dividend, that itself means that the company has fulfilled the expectations of the shareholders of the company;
Disadvantages
- It may create an image in the mind of shareholders that the company does not have any investment opportunities in hand.
- When the company does not have enough funds to invest such funds in the near future, then in that situation also company declares dividend also that means special dividend have very high opportunity costs.
Conclusion
When a company wants to make a distinctive image in the market and has also earned profits above the expectations of the management, they decide to distribute some amount as a special dividend to shareholders. It also creates a good mindset about the company’s financials, as seen from the perspective of shareholders and lenders of the company. It’s a one time amount declared by the company to the shareholders.
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